You are on page 1of 10

Ratio Calculation Guide

Examiners continue to emphasize the asset/liability management process. Credit unions must calculate selected ratios to monitor and manage their financial position and CAMEL rating. This packet of information will simplify this process and provide guidelines for the credit unions ALM committee or Board of Directors to use when making operational decisions. It also corresponds closely to material outlined in NCUA Letter Number 03-CU-04 (March 2003). These ratio formulas, along with definitions and guidelines when appropriate, give insight into three areas of CAMEL: Capital, Asset Quality, and Earnings. Instructions are included on when and how to annualize ratios. The L of CAMEL represents the concept of Asset/Liability Management - the identification, monitoring and control of: Interest rate risk sensitivity and exposure Liquidity risk and control Technical competence in asset/liability management techniques While not specifically ratio driven, this area plus the M component Management - are also evaluated, to some extent, based on the technical competence used by the credit union to produce acceptable results in the areas of capital, earnings, and asset quality. Refer to Letter Number 03CU-04 for specific guidelines.

Frequently Used Calculations


Rightmire/TCUL/2004

1.

Average Loans Previous Year-End Loans + Current Month Ending Loans Total 2 Average Loans ____________ ____________ ____________ ____________ ____________

2.

Gross Total Assets* Stated Assets for Current Month + Current Month Allowance for Loan Losses Gross Total Assets ____________ ____________ ____________

3.

Average Gross Total Assets* Previous Year-End Assets + Previous Year Allowance for Loan Losses + Stated Assets for Current Month + Current Month Allowance for Loan Losses Total 2 Average Gross Total Assets ____________ ____________ ____________ ____________ ____________ ____________ ____________

*The TCUL ALM Resources bases all calculations on gross asset amounts. In order to duplicate exact results, gross assets or average gross assets must be used. For internal monthly calculations, the extra step of adding Allowance for Loan Losses to Stated Assets is not necessary.

CAMEL Ratios
Capital Key Ratio
1. Net Worth /Assets 2
Rightmire/TCUL/2004

$ + +

180 340 10

Regular Reserves Undivided Earnings Current Period Net Income ____________ Gross Total Assets (Page 2, #2) Net Worth/Assets

____________ ____________ ____________

530Net Worth 5,000 10.60%

____________ ____________

Asset Quality Key Ratios


1. Delinquent Loans/Loans $ 30 Total Delinquent Loans (2 Months +) Total Loans (Current Month) Delinquency Ratio ____________ ____________ ____________

2,500 1.20% 2.

Net Charge Offs/Average Loans $ 13.2 2.5 10.7 2,450 .44% Year-to-Date Charge Offs Year-to-Date Recoveries Net Charge Offs Year-to-Date Average Loans (Page 2, #1) Net Charge Offs/Average Loans x Annualization Factor ________ = ____________ ____________ ____________ ____________ ____________ ____________

Earnings Ratios
NCUA Letter Number 03-CU-04 (March 2003) has only one primary ratio for the E component. 1. Return on Average Assets (Net Income after Provision Expense) 3
Rightmire/TCUL/2004

66.4

Net Income/Loss After All Expenses (Including Provision & Cost of Funds) Average Gross Total Assets (Page 2, #3) Return on Average Assets x Annualization Factor _______ =

____________ ____________ ____________ ____________

4,500 1.48%

The Texas Credit Union League ALM Resources suggests a more in-depth assessment of the E component to assist in monitoring the credit unions progress.

1.

Asset Yield $ 294.1 + 132.1 426.2 4,500 9.47% Loan Income Investment Income Total Interest Income Average Gross Total Assets (P.2, #3) Asset Yield x Annualization Factor _______ = ____________ ____________ ____________ ____________ ____________ ____________

2.

Cost of Funds $ 202.5 + 0 202.5 4,500 Dividends on All Deposits Interest on Borrowed Money Financing Costs Average Gross Total Assets (P.2, #3) 4 ____________ ____________ ____________ ____________
Rightmire/TCUL/2004

4.50%

Cost of Funds x Annualization Factor _______ =

____________ ____________

3.

Gross Spread Conclusion 9.47% - 4.50% 4.97% Asset Yield Cost of Funds Gross Spread ____________ ____________ ____________

4.

Net Operating Expense Ratio (NOER) $ 177.1 12.0 7.8 141.3 4,500 3.14% Total Expenses * Fee Income Miscellaneous Operating Income Net Expense Average Gross Total Assets (P.2, #3) 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) 4.97% - 3.14% 1.83% Gross Spread NOER Operating Return On Assets (ROA) ____________ ____________ ____________

Rightmire/TCUL/2004

6.

Net Charge Offs/Average Total Assets $ 13.2 2.5 10.7 4,500 .24% Year-to-Date Charge Offs Year-to-Date Recoveries Net Charge Offs Average Gross Total Assets (P.2, #3) Net Charge Offs(NCOs)/ATA x Annualization Factor _______ = ____________ ____________ ____________ ____________ ____________ ____________

7.

Net Return on Assets (Net Income after Actual Net Charge Offs) 1.83% .24% 1.59% Operating ROA NCOs/ATA Net ROA ____________ ____________ ____________

8.

Loan Mix $ 2,500 5,000 50.0% Total Loans Gross Total Assets (P.2, #2) Loan Mix ____________ ____________ ____________

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, 2002) and will change as assets change.

Rightmire/TCUL/2004

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 calculating anything less than 12 months of income, expense or net charge offs. Annualization Factor = 12 Month Number Example: Jan. Feb. March April May June 12 12 12 12 12 12 1 = 12 2= 6 3= 4 4= 3 5 = 2.40 6= 2 July Aug. Sept. Oct. Nov. 12 12 12 12 12 7 = 1.71 8 = 1.50 9 = 1.33 10 = 1.20 11 = 1.09

To calculate Asset Yield through May: + x Loan Income (January - May) Inv. Income (January - May) Net Interest Income ATA Annualization Factor (12 5) Asset Yield $ 122.5 + 55.0 177.5 4,300 .0413 x 2.4 9.91%

Definitions and Guidelines


This section corresponds to the formulas on the previous pages. There is a definition for each calculation and an industry guideline when applicable. If the credit union is striving to achieve or maintain a certain CAMEL component rating, refer to NCUA Letter Number 03-CU-04 (March 2003). This document, along with the most recent peer group statistics, are available from the Texas Credit Union League ALM Resources.

Capital
7
Rightmire/TCUL/2004

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. Guideline: 7% or higher.

Asset Quality
1. Delinquent Loans/Loans - percentage of loan portfolio currently delinquent two months or more. Guideline: 1.5% or less. 2. Net Charge Offs/Average Loans - percentage of loans charged off from total loan portfolio on an annualized basis. Guideline: .50% or less.

Earnings
NCUA: 1. Return on Average Assets - annualized amount remaining after provision for loan loss and cost of funds. Amount that contributes to increases or decreases to regular reserves and undivided earnings. Guideline: 1% or higher. Texas 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).
8
Rightmire/TCUL/2004

Guideline: Determined by market conditions. group statistics and/or current market rates.

Refer to current peer

2. Cost of Funds - annualized amount 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 unions capital balances which incur no direct cost. Guideline: Determined by market conditions. group statistics and/or current market rates. Refer to current peer

3. Gross Spread - the percentage difference between the credit unions income (loan and investment) on all assets and the cost (dividends and interest on borrowed money) for all liabilities. This ratio, called Net Margin by NCUA, is considered a supporting ratio in NCUA Letter Number 03-CU-04. 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: 1.40% or higher. 6. Net Charge Offs/Average Total Assets - percentage of assets being lost because of annualized net charge offs. Guideline: .40% or less. 7. Net Return on Assets - 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.
9
Rightmire/TCUL/2004

Guideline: 1% or more. 8. Loan Mix - percentage of assets in the loan portfolio. Because loan yield is historically greater than investment yield, loan mix directly affects earnings. Guideline: 60% or higher and refer to current peer group statistics.

10

Rightmire/TCUL/2004