HOW TO USE THIS GUIDE TO RATIO CALCULATION
Ratio Calculation Guide
Since the mid 1980’s, regulators have used the CAMEL Rating System as the primary tool to analyze credit union operations. Until 2007, the CAMEL assessment was driven by selected ratios addressing the operational areas most recently outlined in NCUA Letter 03-CU-04:
➢ Capital
➢ Asset Quality
➢ Earnings
Interest rate risk (IRR) and liquidity management, though not specifically ratio driven, were addressed in the “L” component of the CAMEL Rating System.
In late 2007, NCUA issued a new directive – NCUA Letter 07-CU-12 – which, in conjunction with NCUA Letter 02-FCU- 09, broadened the regulatory focus from a ratio driven assessment to a risk focused exam. The seven categories of risk are:
➢ Credit Risk
➢ Interest Rate Risk
➢ Liquidity Risk
➢ Transaction Risk
➢ Compliance Risk
➢ Strategic Risk
➢ Reputation Risk
Although the focus of the examination has changed, examiners continue to emphasize the need for an organized Asset/Liability Management process. Oversight through the use of ratios is a fundamental part of this process. The information in this handout addresses 11 ratios, along with formulas, definitions, and industry guidelines when appropriate. These ratios are necessary components for the credit union’s Management and Board of Directors as they monitor and manage their financial success in the operational areas of Capital, Asset Quality, and Earnings.
Frequently Used Calculations
1. Average Loans
Previous Year-End Total Loans & Leases (#025B) ____________
+ Current Month Total Loans & Leases (#025B) ____________
Total ____________
( 2
____________
Average Loans ____________
2. Gross Total Assets*
Total Assets for Current Month (#010) ____________
+ Current Month Allowance for Loan Losses (#719) ____________
Gross Total Assets ____________
3. Average Gross Total Assets*
Previous Year-End Total Assets (#010) ____________
+ Previous Year Allowance for Loan Losses (#719) ____________
+ Total Assets for Current Month (#010) ____________
+ Current Month Allowance for Loan Losses (#719) ____________
Total ____________
( 2 ____________
Average Gross Total Assets ____________
*The Cornerstone Key Ratio Report bases all calculations on gross asset amounts. In order to duplicate exact KRR results, gross assets or average gross assets must be used. This is not necessary for monthly internal purposes.
*An asterisk (*) indicates a point of variation on the Key Ratio Report.
CAMEL Ratios
Capital Key Ratio
1. Net Worth/Assets*
$ Regular Reserves (#931) ____________
+ Undivided Earnings & Other Reserves
(#940+#668+#658+#658A+#996+#945+
#945A+#945B+#945C) ____________
+ Current Period Net Income (#602) ____________
Net Worth ____________
( Gross Total Assets (Page 2, #2, Calc Guide) ____________
Net Worth/Assets Ratio (Equity Capital/Assets)* ____________
Asset Quality Key Ratios
1. Delinquent Loans/Loans*
$ Total Delinquent Loans (#041B) ____________
( Total Loans (#025B) ____________
% Delinquency Ratio ____________
2. Net Charge Offs/Average Loans*
$ Year-to-Date Charge Offs (#550) ____________
- Year-to-Date Recoveries (#551) ____________
Net Charge Offs ____________
( Year-to-Date Average Loans (Page 2, #1, Calc Guide) ____________
% Net Charge Offs/Average Loans Ratio ____________
X Annualization Factor ______ = ____________
Earnings Ratios
NCUA Letter Number 03-CU-04 (March 2003) has only one primary ratio for the E component which indicates the credit union’s addition to or reduction of net worth.
1. NCUA Return on Average Assets (ROA)
$ (Net Income/Loss) after All Expenses (Including
Provision & Cost of Funds) (#661A) ____________
( Average Gross Total Assets (Page 2, #3, Calc Guide) ____________
% Return on Average Assets Ratio ____________
X Annualization Factor _____ = ____________
The Cornerstone Credit Union League ALM Resources suggests a more in-depth assessment of the E component to assist in monitoring the credit union’s progress.
1. Asset Yield*
$ Interest on Loans (#110) ____________
+ Income from Investments (#120) ____________
Total Interest Income ____________
( Average Gross Total Assets (P.2, #3, Calc Guide) ____________
% Asset Yield Ratio ____________
X Annualization Factor _____ = ____________
2. Cost of Funds*
$ Dividends on Shares (#380) ____________
+ Interest on Deposits (#381) ____________
+ Interest on Borrowed Money (#340) ____________
Total Interest Expense ____________
( Average Gross Total Assets (P.2, #3, Calc Guide) ____________
% Cost of Funds Ratio ____________
X Annualization Factor ______ = ____________
3. Gross Spread Conclusion*
Asset Yield Ratio (P.4, #1, Calc Guide) ____________
- Cost of Funds Ratio (P.5, #2, Calc Guide) ____________
= Gross Spread Ratio ____________
4. Net Operating Expense Ratio (NOER)*
$ Total Non-Interest Expense (#671)** ____________
- Fee Income (#131) ____________
- Other Operating Income (#659) ____________
Net Expense ____________
( Average Gross Total Assets (P.2, #3, Calc Guide) ____________
% Net Operating Expense Ratio ____________
X Annualization Factor _______ = ____________
**Do not include provision for loan loss expense, dividend expense and non-operating gain/loss in this total.
5. Operating Return on Assets (Net Income before reserve transfers)*
Gross Spread Ratio (P.5, #3, Calc Guide) ____________
- Net Operating Expense Ratio (P.5, #4, Calc Guide) ____________
= Operating Return on Assets (ROA) Ratio ____________
6. Net Charge Offs/Average Total Assets*
$ Year-to-Date Charge Offs (#550) ____________
- Year-to-Date Recoveries (#551) ____________
Net Charge Offs ____________
( Average Gross Total Assets (P.2, #3, Calc Guide) ____________
% Net Charge Offs (NCOs)/ATA Ratio ____________
X Annualization Factor _______ = ____________
7. Net Return on Assets (Net Income after Actual Net Charge Offs)*
Operating ROA Ratio (P.6, #5, Calc Guide) ____________
- Net Charge Offs (NCOs)/ATA Ratio (P.6, #6, Calc Guide) ____________
= Net Return on Assets (ROA) Ratio ____________
8. Gross Loan Mix*
$ Total Loans & Leases (#025B) ____________
( Gross Total Assets (P.2, #2, Calc Guide) ____________
% Gross Loan Mix Ratio ____________
Annualization – How and Why
Ratios are easy to calculate at year-end, but you may need to calculate ratios at other times - monthly, quarterly, semi-annually, and annualization may be necessary.
Annualization is not necessary when calculating mixes, capital, or delinquency ratio. These ratios are correct only on a given day (example: December 31, 20XX) and will change as assets change.
Ratios that include income, expense or charge off amounts - amounts that occur over an accounting period - must be annualized and must be divided by an average balance (example: average assets, average loans).
The easiest way is to use calendar year-to-date results and annualize as the last step of the calculation rather than annualizing each dollar amount in the formula. An annualization factor will be necessary when a calculating any ratio when amounts are less than 12 months of income, expense or net charge offs.
Annualization Factor = 12 ( Month Number
Example:
January 12 ( 1 = 12 July 12 ( 7 = 1.71
February 12 ( 2 = 6 August 12 ( 8 = 1.50
March 12 ( 3 = 4 September 12( 9 = 1.33
April 12 ( 4 = 3 October 12 ( 10 = 1.20
May 12 ( 5 = 2.40 November 12 ( 11 = 1.09
June 12 ( 6 = 2
To calculate Asset Yield through May:
Loan Income (January - May) $ 2010.0
+ Inv. Income (January - May) + 37.2
Net Interest Income 2047.2
( ATA ( 121376
.0169
X Annualization Factor (12 ( 5) x 2.4
Asset Yield 4.05%
Definitions and Guidelines
This section corresponds to the formulas on the previous pages. It includes a definition for each ratio and an industry guideline when applicable.
Capital
1. Net Worth/Assets - Percentage of earnings from current and previous periods set aside to absorb operational losses. Higher levels of net worth allow the credit union to be more competitive with dividend rates and fee structures, support asset growth, and survive difficult periods.
PCA Guideline: 7% or higher
Cornerstone CU League Guideline: 9% or higher
Asset Quality
1. Delinquent Loans/Loans - percentage of loan portfolio currently delinquent two months or more.
Guideline: 2% or less
1. Net Charge Offs/Average Loans – annualized percentage of loans being lost because of net charge offs (loan losses minus recoveries).
Guideline: .40% or less
Earnings
NCUA ROA:
Return on Average Assets - annualized percentage of income remaining after provision for loan loss and cost of funds. Percentage that contributes to increases or decreases to regular reserves and undivided earnings.
Guideline: 1% or higher is CAMEL Code 1 under NCUA Letter 03-CU-04
.80 - .99 is CAMEL Code 2
.35 - .70 is CAMEL Code 3
Cornerstone Credit Union League ALM Resources:
1. Asset Yield - the annualized yield on assets, both earnings assets (loans and investments) and non-earning assets (fixed assets, accounts receivable, and cash).
Guideline: Determined by market conditions. Refer to current peer group statistics and/or current market rates.
2. Cost of Funds - annualized percentage of dividends paid on deposits and interest paid on borrowed funds. A combined cost for money purchased from the member or a liquidity source coupled with the credit union’s capital balances which incur no direct cost.
Guideline: Determined by market conditions. Refer to current peer group statistics and/or current market rates.
3. Gross Spread - the percentage difference between the credit union’s income (loan and investment) on all assets and the cost (dividends and interest on borrowed money) for all liabilities.
Guideline: 4.5% - 5% or higher
4. Net Operating Expense Ratio - annualized operating expenses (excluding provision for loan loss, dividends, non-operating amounts, and interest on borrowed money) less fee and other miscellaneous operating income. This ratio adjusts operating expenses by the amount of income collected to offset the cost of offering services.
Guideline: 3% or lower, but changes depending on asset size. Refer to current peer group statistics.
5. Operating Return on Assets (ROA) - percentage of net operating income after dividends, but before reserve transfers (including provision for loan loss), actual net charge offs, or non-operating gains or losses.
Guideline: 1.30% or higher
6. Net Charge Offs/Average Total Assets - annualized percentage of assets being lost because of net charge offs (loan losses minus recoveries).
Guideline: .40% or less
7. Net Return on Assets (ROA) - percentage of net operating income after dividends, non-operating amounts, interest refunds, and net charge offs. Amount that results in increases or decreases to regular reserves and undivided earnings.
Guideline: 1% or higher
8. Loan Mix - percentage of assets held in the loan portfolio. Because loan yield is historically greater than investment yield, loan mix directly affects earnings.
Guideline: 65% or higher and refer to current peer group statistics.[pic]
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