Sample Key Ratios

PROFITABILITY

Return on Assets

Relates annualized after tax net income to the assets of the bank and gives a measure of how well management is utilizing these resources in the generation of profits.

Return on Equity

This is the most common ratio used for measuring the return on a bank stockholder's investment and is greatly influenced by the use of leverage, i.e., borrowed funds.  A small equity base and a high utilization of profitable leverage offers a greater return to the stockholder, whereas a large equity base and minimal utilization of profitable leverage tends to decrease the return on equity.

Return on Capital

This ratio is essentially the same as the previous ratio with the difference being the inclusion of capital notes with equity.  Since it is unlikely that the funds derived from the issuance of capital notes could be safely invested to return after tax income on the same basis as that derived from equity, the inclusion of capital notes depresses the bank's return on capital.  Capital debt does, however, offer certain advantages such as a source of investable funds, a solution to regulatory pressures to increase capital, a mechanism to increase the bank's loan limit to a single customer and through the use of leverage improve the return on equity ratios as previously covered.

Pretax Income to Assets

Relates fully taxable equivalent operating income before taxes to assets and thus measures the pretax earnings power of the total average asset base.

Taxes to Assets

Relates taxes paid on taxable income as a percentage of average total assets and thus expresses the annualized reduction in return on assets caused by the payment of income tax.

Tax Adjustment to Assets

Relates the imputed tax effect on non-taxable income as a percentage of average total assets and thus expresses the annualized tax saving derived from non-taxable income.

NOTE:  Tax equivalent income or tax equivalent income adjustment is determined as follows:  [Tax Exempt Income/(1-Marginal Tax Rate)] - Tax Exempt Income.

Effective Tax Rate

The effective rate of income tax paid on pretax net operating income.  The difference between this rate and the marginal tax rate reflects the impact of non-taxable income on the bank's overall tax liability.

Adjusted Return on Assets

Relates current operating results on a fully taxable basis to average assets as if the provision for loan losses for the period was exactly equal to net charge offs.

ASSET AND LIABILITY MANAGEMENT

Earning Assets to Total Assets

This ratio measures the efficiency of the bank as to the utilization or investment of assets in an earning capacity.  All interest bearing assets (interest bearing due from bank balances, loans, obligations of the U.S. Government, states and political subdivisions, other securities, federal funds sold, securities purchased under agreements to resell, trading account, and direct lease financing balances) divided by average assets.  The reciprocal of this ratio thus represents the percentage of total assets deployed in a non-earning capacity.

Interest Income to Assets

Taxable equivalent income earned on all interest bearing assets (loans, due from banks, securities, federal funds sold, resale agreements, and other interest earning assets) divided by total average assets for the period.  This number can therefore be viewed as the pretax contribution of interest income to return on assets.

Interest Expense to Assets

Total interest expense incurred on all interest bearing liabilities (interest bearing deposits, fed funds purchased, securities sold under agreements to repurchase, interest on other borrowed money, demand notes issued to the U.S. Treasury, subordinated notes, and debentures) divided by total average assets.  This number can be viewed as the pretax reduction in return on assets caused by the payment of interest on borrowed funds and deposits.

Net Interest Income to Assets

Relates interest income (TE) minus interest expense (as previously defined) divided by total average assets.

Adjusted Net Interest Income to Assets

Net interest income (TE) minus provision for credit losses divided by total average assets.  This ratio thus includes the provision as a credit cost.

Loan Loss Provision to Assets

Actual provision for credit losses divided by total average assets.  Relates the pretax effect of the provision for loan losses on return on average assets.

Tax Exempt Securities to Total Securities

Relates tax free securities such as Municipals, some Governments, etc., as a percentage of the total investment securities portfolio.  Such securities, though lower in yield, often offer an attractive alternative investment vehicle due to the tax advantages they provide.

Investment Securities to Earning Assets

Relates average securities (obligations of the U.S. Government, state and political subdivisions, and other securities) divided by total average earning assets, including investment securities, loans, due from bank time deposits, foreign time deposits, fed funds sold, and resale agreements.  Apart from securities with short terms to maturity and long term fixed rate loans, this ratio provides a general measure of the long-term fixed rate assets included in the bank's earning asset portfolio.

Net Loans to Earning Assets

Relates gross loans (all categories) less unearned discounts, participations sold, and reserves for possible credit losses to total earning assets.

Interest Free Deposits to Total Deposits

Relates non-interest bearing deposits, i.e., demand, (including IPC and other) as a percent of total deposits.  This ratio has dropped in all but a few cases over the past few years as corporate cash managers and the consumer have begun to place their excess funds into interest bearing instruments.

Transaction Account Deposits to Total Deposits

This relates total transaction accounts including demand, N.O.W. and money market checking to total average deposits.

Large CD's to Total Deposits

Relates the average balance of CD's $100 thousand and over including due to bank CD's and public fund time deposits to total average deposits.  These funds are examples of deposits which are potentially volatile due to their tendency to move for a better rate.  Moreover, these deposits have not only become a very expensive funding source but the primary source of funds in many commercial banks.

Static Gap

A position/situation at a given point in time of the mismatch between the maturities and repricing attributes of a bank's assets and liabilities, usually in the recent past, i.e., month end.

Dynamic Gap

A gap position/situation at some future point(s) in time based on an expected or forecasted series of events.

Gap Risk

Indicates the relative impact "gap" has on earnings, i.e., if market interest rates were to move by 1% in tandem (100 basis points) and the bank's gap risk (Gap/Total Assets) were 20%, then the bank's ROA would be affected by 20 basis points up or down depending on whether the "gap" was positive or negative.

RSA/RSL

Rate sensitive assets divided by rate sensitive liabilities or the amount of maturing and repriceable assets as a percentage of maturing and repriceable liabilities at specified periods, i.e., 30 days, 60 days, 90 days, etc.  This ratio if equal to "1" would indicate a balanced relationship, or zero (0) gap.

OPERATING EFFICIENCY

Non-Interest Income to Assets

Relates all income derived from sources other than interest income on earning assets, i.e., service charges, NSF charges, teller and exchange fees, rent on safe deposit boxes, etc., to average assets.  Thus, it is a dollar measure relating the pretax contribution of service and other revenues to return on assets, or for every $100 in total average assets, we earned $X.XX in non-interest income.

NOTE:  Historically, commercially oriented banks have had a lower ratio of non-interest income to assets than retail oriented bands due to the level of services provided to commercial customers in exchange for "soft dollar" - compensating balance - payment.

Employment Expense to Assets

This is all expenses related to employment including both salaries and benefits (insurance, FICA, Workman's Comp, employers contribution to pension plan, and employment fees) and contract labor divided by total average assets.  Thus it is a measure relating the pretax cost of staffing to return on assets, or for every $100 in assets, it cost $X.XX in employment cost.

NOTE:  In a commercially oriented bank (low volume), the cost in terms of return on assets may be much lower than in a highly retail oriented bank (high volume).

Net Occupancy Expense to Assets

This relates total occupancy expense including rents, utilities expense, depreciation, ad valorem taxes, maintenance, etc., net of any rental or occupancy income produced to total average assets.  Thus, this is a measure of the pretax cost of facilities to return on assets.  This ratio varies significantly by market area, as well as by age and ownership of physical facilities, etc.

Equipment Expense to Assets

Relates total equipment cost including depreciation expense on furniture, fixtures and equipment, equipment rental, maintenance and repairs, etc., to total average assets.  Again a measure of the pretax cost of equipment in relation to return on assets.

Occupancy and Equipment Expense to Assets

The total cost to own, maintain, and operate fixed assets in the conduct of banking business divided by the total average assets.  To some degree, a measure of the pretax overhead burden in relation to return on assets.

Other Operating Expense to Assets

This relates all other overhead expense such as advertising, promotional costs, communications, supplies, professional fees, data processing costs, and miscellaneous expenses to total average assets.  Again, this offers a measure of the pretax impact of these expense on return on assets.

Non-Interest Expense to Assets

Essentially, this relates all of the non-interest expenses including employment, occupancy and equipment, and other to average assets.  This ratio summarizes the pretax impact of total operating expenses on return on assets.

NOTE:  The provision is not included here.

Burden

Relates net non-interest expense (non-interest expense less non-interest income) to total average assets.  This ratio summarizes the pretax impact of all other items other than net interest income on return on assets.

Non-Interest Income to Non-Interest Expense

Relates total non-interest income (income other than that derived from earning assets) to all expenses incurred other than interest paid on deposits and other borrowed funds and the loan loss provision.  Quite often this ratio is referred to as "coverage" in that it is the percentage of non-interest expenses recovered through service charges and fees and other income.

Non-Interest Expense to Net Income

Relates total expense other than interest paid and the provision for loan losses as a multiple of net income, or for every dollar of after tax profit $X.XX were expended for non-interest related costs.

Earnings Per Employee

Total income divided by the total number of full time equivalent employees. Thus, this ratio expresses average after-tax income earned for the period for each employee or the theoretical "contribution" per employee to net income.

NOTE:  In most instances, the ratio will be higher in a commercially oriented bank as opposed to one that is highly retail and therefore requires more people to handle the higher volume.

Employment Expense Per Employee

This relates total employment cost (salaries and benefits) to the total number of full time equivalent employees, in other words, the average employment cost for the period for each employee.  This ratio will be largely dependent on the mix of personnel and levels of compensation and benefits and thus reflective of the market place served and to some lesser extent the orientation of the bank in that market.

Deposits Per Employee

Relates total average deposits (in thousands) per full time equivalent employee.  Much has been said about a magical threshold of $1MM per employee, however, this number is very sensitive to the customer base serviced and deposit mix maintained.  In a large commercial bank we would expect a ratio in excess of $1MM per employee while in a smaller, retail (high volume, low average balance) institution a ratio of $0.6MM or $0.7MM might be acceptable.

Assets Per Employee

Total average assets (in thousands) divided by total full time equivalent employees.  Again, this ratio will likely be much higher in a commercially oriented bank as opposed to a retail bank.

LIQUIDITY AND CAPITAL ADEQUACY

Cash and Due From Banks to Total Deposits

This relates total cash including cash items or float plus balances in other banks, both foreign and domestic, both interest bearing and non-interest bearing to total deposits.  Thus, it expresses the amount of deposits used to fund these assets.

Net Funds Sold to Total Deposits

Total funds sold (including resale agreements) less total funds purchased (including repurchase agreements) divided by total deposits.  This ratio is a valuable measure of liquidity in that it presents the percentage of deposits invested in short term liquid assets.  Note that if the bank is in a net borrowed position, i.e., funds purchased exceed funds sold, then the percentage ratio would be negative and therefore no ratio or "N/A" is shown.

Loans to Deposits

Relates total loans, net of participations sold and deferred income to total deposits.  The higher the ratio the lower the liquidity, thus it measures how much of the bank's deposits are being invested in loans or "non-liquid" assets.

Liquidity

Liquidity is basically net liquid assets divided by net liabilities and measures the bank's ability to meet its credit needs and depositors demands for cash. Net liquid assets are defined as cash, cash items and due from banks, unpledged government securities, other unpledged securities with maturities of two years or less, securities purchased under agreement to resell of thirty days maturity or less (regardless of the maturity of the securities) net of securities sold under agreements to repurchase, the smaller balance of due from time and due to banks time, and the smaller balance of fed funds sold and fed funds purchased minus reserves. Net liabilities are defined as total liabilities excluding valuation reserves, capital, and acceptances less the smaller balance of due from time and due to banks time, the smaller balance of fed funds sold and fed funds purchased, mortgage indebtedness, securities sold under agreements to repurchase, secured liabilities (public funds, TT&L, and trust deposits) and interest collected but not earned.

Equity to Total Capital

This relates total equity including paid in capital plus surplus, undivided profits, current year earnings, and capital reserves to total capital including equity, the loan loss reserve and capital notes.  Thus it is a measure of leveraged capital.

Net Short Term Borrowings to Equity

Relates total short term borrowings, defined as funds purchased, repurchase agreements, plus any other interest bearing liability with a maturity of one year or less net of any short term investments, i.e., funds sold, and resales with terms of under one year to total equity (as defined previously).

NOTE:  If short term investment exceed short term borrowings, the ratio will be negative and therefore not shown.  This ratio indicates a reliance on short term borrowings to fund assets and thus a high ratio tends to make examiners very nervous.  As a rule of thumb, this ratio should never exceed 100% for any sustained period although it might reach this level occasionally.  Growth in this ratio may indicate that liquidity problems are present.

Equity to Assets

Relates total capital stock, surplus, undivided profits, and capital reserves divided by total assets.  An indication of how much of the bank's total assets are financed by the bank's shareholders.  The higher the ratio, the stronger the margin of protection to depositors and creditors against losses.

NOTE:  The system uses end of month balances for this calculation.

Capital to Assets

This ratio includes capital notes and the reserve for loan loss along with equity.  A measure of capital adequacy, it is concerned with the aggregate degree of protection available to depositors.

Equity to Loans

Relates total equity (defined previously) to loans net of participations sold.  An indication of how much of the bank's portfolio is financed by the bank's shareholders.  "Equity" represents that margin of protection to the bank's creditors and depositors against losses.

Capital to Loans

This relates total equity capital plus subordinated debt, capital notes and the loan loss reserve to total net loans.  This ratio is concerned with the aggregate degree of protection to depositors and indicates how much of the institution's loan portfolio is financed by equity plus long term debt.

Equity to Earning Assets

Total equity capital (stock, surplus and retained earnings) divided by all fixed rate and rate sensitive assets (loans, investments, etc.).  This reflects the percent of the bank's earning assets funded by the bank's shareholders.

Capital to Earning Assets

Total capital including equity and the loan loss reserve plus subordinated notes, capital notes, etc., divided by total earning assets.  This measures total invested leverage relative to capital funds in earning assets (total loans, securities, and temporary investments).

Equity to Deposits

The relationship between the depositors interest and the shareholders interest in the bank (no debt).  This is a measure of the ability of the bank to absorb losses via its "equity cushion".  Equity includes capital stock, surplus and undivided profits, including current period earnings.

Capital to Deposits

Total capital including "debt capital", the loan loss reserve and equity divided by deposits.

Primary Capital to Assets

Relates total capital stock, surplus, undivided profits, capital reserves plus the reserve for possible loan losses divided by total assets.  An indication of how much of the bank's total assets are financed by the bank's shareholders before allocating any capital as a reserve for loan losses.  The higher the ratio, the stronger the margin of protection to depositors and creditors against losses.

NOTE:  The system uses end of month balances for the calculation.

CREDIT QUALITY

Adjusted Pretax Income to Net Loan Losses

This relates income before taxes plus the provision for loan losses less any tax equivalent income adjustment to loan charge-offs (for the period) net of any recoveries.  In effect it shows an earnings coverage multiple to the extent that adjusted pretax earnings exceed current loan losses.

NOTE:  This ratio will be less than 1.00 if net losses exceed current pretax earnings and show "N/A" if there are net recoveries for the period.

Loan Loss Reserve to Loans

The reserve for loan losses divided by total loans net of participations sold.  An indication of protection against possible charged off loans, it shows the percentage of outstanding loans that could become losses and be absorbed before directly affecting the equity accounts.

NOTE:  The system uses end of month balances for the calculation.

Net Charge-Offs to Loans

This relates current period loan losses net of any recoveries to total loans net of participations sold and deferred income.  A reflection in part of the quality of the loan portfolio.

Loan Losses

Actual losses for the period expressed as a decimal equivalent of a thousand, i.e., $10,236 would be expressed as 10.236.

Recoveries

Actual recoveries for the period expressed as a decimal equivalent of a thousand in parentheses, i.e., $12,840 would be (12.840).

FINANCIAL DATA AND GROWTH RATES

Earnings Per Share

This shows net income for the period on a per share outstanding basis and thus provides an indication of annual earnings if current earnings are reflective of what can be expected for the year.

Asset Growth

How fast assets are growing.  Total average assets for the current period less total average assets for the same period a year ago, divided by total average assets for the same period a year ago.

Loan Growth

How fast loans are growing.  Total average loans outstanding (net of participations sold) for the current period less total average loans for the same period a year ago, divided by total average loans for the same period a year ago.

Deposit Growth

How fast deposits are growing.  Total deposits for the current period less total average deposits for the corresponding period in the prior year.  Divided by the total average deposits for the corresponding period in the prior year.

Equity Growth

How fast equity is growing.  Same calculation as above using total average stockholders equity (capital stock, surplus, undivided profits and current earnings).  Reflects growth in equity from retained earnings (earnings put back into the bank net of any dividends or equity adjustments).  This rate can also be affected, however, through the raising of equity via a sale of stock.  Viewed in tandem with the asset growth rate, this rate becomes very critical in that it provides a measure of leveraged growth potential, i.e., should the asset growth rate remain above the equity growth rate for a sustained period of time, the bank will eventually find its capital adequacy significantly reduced, perhaps to the extent where growth must be constrained or new capital raised (either through sale of shares or increased earnings/reduced dividends) until such time as the capital position is returned to acceptable levels.

YIELDS AND RATES

Earning Assets

Earning assets consist of all interest bearing investments including due form bank time deposits, investment and trading account securities, fed funds sold, loans and equipment leasing.

Yield on Earning Assets

The yield on earning assets is the average rate of return on a fully taxable equivalent basis from these investments, thus it includes all interest income plus fees on loans.

Gross Cost of Funds

This measures the total average annualized rate paid on interest bearing liabilities.

Gross Interest Margin

The arithmetic difference between the yield on  earning assets and the gross cost of funds, this margin can be viewed as the average pricing spread between earning assets and interest bearing liabilities.  Maximization of this spread is becoming more and more critical as purchased money assumes the predominant role in funding existing assets and growth.

Effective Cost of Funds

This measures the total average annualized rate paid on all sources of funds, i.e., total interest expense divided by total funding sources (total interest bearing sources plus interest free sources including equity and demand deposits less cash and due from banks and net other assets).

NOTE:  By definition, total sources of funds equals total earning assets.

Net Interest Margin

Gross interest income (on a fully taxable equivalent basis) less gross interest expense (i.e., net interest income) divided by total earning assets.  The difference between this rate and the gross interest margin reflects the gain in spread pricing afforded by interest free sources.

Net Interest Margin*

Same as the net interest margin above but adjusted to reflect an actual accrual for all accounts.

Adjusted Net Interest Margin

This measure includes the provision for possible credit losses as an interest cost or an additional cost of lending, i.e., interest income less interest expense and the loan loss provision divided by average earning assets.

Adjusted Yield on Loans

This measures the overall rate of return on the bank's loan portfolio after deducting the loan loss provision as a credit risk cost, i.e., interest and fees on loans less the provision for loan losses divided by average loans outstanding.

Breakeven Yield

The sum of all expenses (interest expense plus non-interest expenses and the provision for loan losses) minus non-interest income divided by total average earning assets, or the yield necessary to cover overhead and interest costs net of any non-interest income.  Thus, the difference between this cost and the yield on earning assets.  This amount can also be viewed as the average pretax cost to fund existing earning assets.  Please note that this number should not be used for incremental pricing decisions in that it assumes that incremental assets would be funded in direct proportion to the existing liability and expense mix.  It can, however, be used to evaluate the relative contribution of existing assets based on their current yield.

Yield

The gross return on an investment (earning asset) as determined by the interest income for that investment divided by the average balance outstanding.

Taxable Equivalent Yield (Taxable Equivalency)

A technique used to evaluate the relative earnings between differing investments of a taxable and non-taxable nature, i.e., because of the tax-exempt status of certain types of investment instruments, their pretax cash flow yield can be substantially reduced compared to that of investments where the income stream is subject to federal and/or state/local income taxes.  Thus, to provide comparison between the pretax return of such alternative investments, it is necessary to inflate the income (yield) on tax-exempt assets to a level commensurate with a fully taxable investment.  In other words, add to the tax exempt income that percentage which would represent the tax liability due had the investment been fully taxable.

Rate Paid

The gross return paid to a depositor, class of depositors, or other lenders, for the use of their funds, as determined by the interest expense paid (accrued) for the liability divided by the average balance of that liability.