This rating reflects the adequacy of current and future earnings to fund capital commensurate with the credit union’s current and prospective financial and operational risk exposure, potential changes in economic climate, and strategic plans. Earnings can be affected by excessive or inadequately managed credit risk that may result in loan losses and require additions to the ALLL, or by market risk that may unduly expose a credit union’s earnings to volatility in interest rates. The quality of earnings may also be diminished by undue reliance on extraordinary gains or nonrecurring events.
An inability to forecast or control funding and operating expenses, improperly executed or ill-advised business strategies, or poorly managed or uncontrolled exposure to other risks may limit future earnings.
The rating of a credit union’s earnings is based on, 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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Quality and sources of earnings
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Ability to fund capital commensurate with current and prospective risk through retained earnings
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Adequacy of valuation allowances
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Adequacy of budgeting systems, forecasting processes, and management information systems
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Future earnings adequacy under a variety of economic conditions
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Quality and composition of assets
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Earnings exposure to market risk, including IRR
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Material factors affecting the credit union's income producing ability, such as fixed assets and other non-earning assets
Earnings Ratings
| Rating | Description |
| 1 | Indicates earnings that are sound. Adequate capital and allowance levels already exist after considering asset quality, growth, and risk factors. |
| 2 | Indicates earnings that are satisfactory. Earnings are sufficient to reach adequate capital and allowance levels after considering asset quality, growth, and risk factors. |
| 3 | Indicates earnings that need to be improved. Earnings may not fully support current and future capital and allowance funding commensurate with the credit union’s overall condition, growth, and risk factors. |
| 4 | Indicates earnings that are deficient. Earnings are insufficient to support current and future capital and allowance funding commensurate with the credit union’s overall condition, growth, and risk factors. |
| 5 | Indicates earnings that are critically deficient and represent a distinct threat to the credit union’s viability. Earnings do not support current and future capital and allowance funding commensurate with the credit overall condition, growth, and risk factors. |
Last updated April 29, 2022
