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The ratio of net income for the year (year-to-date quarterly figures are converted to a 12-month equivalent) as a percentage of average assets for the year. This ratio, known as ROA, is the most commonly used benchmark for bank profitability since it measures the company’s return on investment in a format that is easily comparable with other companies.

Historically speaking, a ratio of 1.0% or greater has been considered good performance. However, this ratio will fluctuate with the prevailing economic times. Also, larger banks tend to have a lower ratio.

The ratio of net income for the year (year-to-date quarterly figures are converted to a 12-month equivalent) as a percentage of average equity for the year. This ratio, known as ROE, is commonly used by a company’s shareholders as a measure of their return on investment. It is not always a good measure of profitability, however, because inadequate equity levels at some institutions can result in inappropriately high ROE’s.

A regulatory ratio defined by the federal banking regulators as total (tier 1 + tier 2) capital divided by risk-weighted assets. This ratio addresses the issue that not all assets present the same level of credit risk to an institution. As such, all assets and certain off-balance sheet commitments are assigned to risk categories based on the level of credit risk they pose and then weighted accordingly to arrive at risk-weighted assets. 

For instance, assets with virtually no risk, such as cash and U.S. Treasury securities, are risk-weighted at 0% and therefore, not included in the calculation. Assets with low risk, for example, high quality mortgage-backed securities and state and municipal bonds, are partially weighted at 20%.  

Those assets possessing moderate risk, such as residential mortgages and state and local revenue bonds are partially weighted at 50%. And finally, assets considered to possess “normal” or “high” risk, including certain off-balance sheet commitments such as unfunded loans, are risk-weighted at 100%. The summation of these categories of risk-weighted assets results in the figure used in the denominator of this ratio.

 Please be aware that not all banks and savings banks are required to report risk-weighted assets as defined by the federal regulators. Consequently, we have estimated this figure when necessary based on estimates used by the regulators themselves.