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.

Rightmire/Cornerstone/2017
 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.

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 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 ______ = ____________

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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 _____ = ____________

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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.

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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 ____________

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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%

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 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

2. 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

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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

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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.

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