The asset quality rating reflects the quantity of existing and potential credit risk associated with the loan and investment portfolios, other real estate owned, and other assets, as well as off-balance sheet transactions. The ability of management to identify, measure, monitor, and control credit risk is also reflected here.
When evaluating asset quality, the examiner considers the adequacy of the ALLL and weighs the exposure to counterparty issuer or borrower default under actual or implied contractual agreements. Examiners consider all other risks that may affect the value or marketability of a credit union’s assets, including but not limited to the seven risk categories.
A credit union’s asset quality is based upon, but not limited to, an assessment of the following evaluation factors. The order of these factors does not signify a level of importance.
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The quality of loan underwriting, policies, procedures, and practices
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The internal controls and due diligence procedures in place to review new loan programs, high concentrations, and changes in underwriting procedures and practices of existing programs
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The level, distribution, and severity of classified assets
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The adequacy of the ALLL and other asset valuation reserves
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The level and composition of nonaccrual and restructured assets
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The ability of management to properly administer its assets, including the timely identification and collection of problem assets
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The existence of significant growth trends indicating erosion or improvement in asset quality
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The existence of loan concentrations that present undue risk to the credit union
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The appropriateness of investment policies and practices
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The investment risk factors when compared to capital and earnings structure
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The effect of fair (market) value of investments compared to book value of investments
Asset Quality Ratings
| Rating | Description |
|---|---|
| 1 | Indicates sound asset quality and credit administration practices. Identified weaknesses are minor in nature and risk exposure is modest in relation to capital adequacy and management’s abilities. Asset quality is of minimal supervisory concern. |
| 2 | Indicates satisfactory asset quality and credit administration practices. The level and severity of classifications and other weaknesses warrant a limited level of supervisory attention. Risk exposure is commensurate with capital adequacy and management’s abilities. |
| 3 | Assigned when asset quality or credit administration practices are less than satisfactory. Trends may be stable or indicate deterioration in asset quality or an increase in risk exposure. The level and severity of classified assets, other weaknesses, and risk require an elevated level of supervisory concern. There is generally a need to improve credit administration and risk management practices. |
| 4 | Assigned to credit unions with deficient asset quality or credit administration practices. The levels of risk and problem assets are significant, inadequately controlled, and subject the credit union to potential losses that, if left unchecked, may threaten the credit union’s viability. |
| 5 | Represents critically deficient asset quality or credit administration practices that present an imminent threat to the credit union’s viability. |
Last updated April 29, 2022
