CU Risk Index: A Guide to the 22 Key Ratios

In the complex and ever-evolving landscape of financial services, understanding the true health and risk profile of a credit union is paramount. How can you look beyond the surface-level numbers to see the full picture of performance, risk, and opportunity? The key lies in robust, data-driven financial ratio analysis.

A New Standard in Risk Assessment: The CU Risk Index

The CU Risk Index is an innovative, subscriber-based platform designed to transform complex financial call report data into clear, actionable insights. Built upon a massive dataset of over 500,000 observations per ratio, the Index analyzes twenty-two critical financial metrics. It applies an objective, 4-tier scoring system to provide a transparent and robust assessment of relative risk, making it a vital tool for credit unions of all sizes.

The 22 Ratios That Define Credit Union Health

To truly understand a credit union's performance, it is essential to analyze a comprehensive set of metrics across several key areas. Here is a breakdown of the ratios included in the CU Risk Index and why each one is critical for risk assessment.

Capital Adequacy

These ratios measure a credit union's ability to absorb unexpected losses and protect against insolvency.

• Net Worth to Total Assets: This is a primary regulatory measure of capital adequacy. A strong net worth provides a crucial cushion to absorb potential losses and support future growth, reducing the risk of insolvency.

• GAAP Equity to Total Assets: This ratio provides a comprehensive view of the capital position according to Generally Accepted Accounting Principles (GAAP). It includes a broader range of equity components, such as unrealized gains or losses on certain investments. Like the net worth ratio, it signifies the institution's capacity to absorb losses.

Earnings

These ratios assess the quality and sustainability of a credit union's profits.

• Net Income to Average Assets (ROAA): This ratio reflects how efficiently an institution is using its assets to generate net earnings. Poor profitability can signal an unsustainable business model, while strong earnings allow an institution to build its capital base internally.

• Net Interest Margin to Average Assets: As a key indicator of core profitability, this measures the difference between interest earned on assets and interest paid on liabilities. A compressed or negative margin indicates a struggle to cover operating expenses and generate net income from fundamental lending and investment activities.

• Fee & Other Operating Income / Average Assets: This metric measures income from non-interest sources, such as member service fees. It is important because a strong stream of non-interest income indicates better revenue diversification and less reliance on the potentially volatile net interest margin.

• Operating Expense to Average Assets: This reflects the cost of managing the institution's asset base. High operating expenses can consume a large portion of income, directly reducing profitability and overall efficiency.

• Operating Expense to Gross Income (Efficiency Ratio): This ratio shows how much an institution spends to generate one dollar of gross income. It is a direct measure of operational efficiency; a high ratio means more income is being consumed by expenses, with ratios over 100% signifying an operating loss.

Asset Quality

Asset quality ratios are crucial for understanding the level of credit risk within the loan portfolio.

• Delinquent Loans to Total Loans: This measures the percentage of loans that are past due. Higher delinquency indicates deteriorating loan quality and an increased probability of future loan losses, which can negatively impact earnings and capital.

• Rolling 12-Month Net Charge-Offs to Average Loans: This reflects the actual, realized loan losses experienced over the past year after accounting for recoveries. High net charge-offs directly reduce earnings and erode the institution's capital base.

• Allowance for Loan and Lease Losses (ALLL) / Delinquent Loans: Known as the coverage ratio, this measures how many times the current balance of delinquent loans is covered by the funds set aside for losses. A low ratio may suggest the institution is under-provisioned and that the current allowance is insufficient to cover potential losses from its delinquent loans.

• Loss Coverage Ratio: This ratio assesses the adequacy of a credit union's total capacity to absorb losses (from both net worth and reserves) against a wide range of problematic assets. A high ratio indicates that these troubled assets represent a large percentage of the institution's capital, signaling a diminished capacity to absorb further losses without significant financial distress.

Liquidity (ALM)

These ratios gauge an institution's ability to meet its short-term funding needs.

• Loan to Share Ratio: This measures how much of the credit union's member share deposits are being used to fund loans. A very high ratio can indicate liquidity strain and an over-reliance on core deposits to fund loan growth, while a very low ratio may suggest missed earning opportunities.

• Cash and Short-Term Investments to Assets: This ratio shows the proportion of assets held in highly liquid forms. While a low ratio points to liquidity risk and an inability to meet short-term obligations, a very high ratio suggests assets are underutilized and earning low returns, which can hurt overall profitability.

• Borrowings to Total Shares and Net Worth: This measures the reliance on external borrowings relative to the core funding base of shares and capital. A heavy reliance on external borrowings can increase liquidity risk, interest rate risk, and overall financial leverage compared to using more stable and typically lower-cost core share deposits.

Member Relationship (Productivity/Penetration)

These ratios help assess member engagement and concentration risk.

• Borrowers to Members Ratio: This measures the percentage of members who have an active loan. It serves as an indicator of loan penetration and member service engagement.

• Average Shares per Member: This is the average deposit balance for each member. An extremely high average could signal concentration risk from a few large depositors, while a very low average may indicate that members do not use the credit union for their primary financial needs.

• Average Loan Balance (per loan): This calculates the average size of each loan. Very high average balances could indicate concentration risk in a few large loans, while very low balances may point to inefficiency or lower profitability per loan.

Growth

Growth ratios are vital for assessing sustainability and strategic management.

• Asset Growth (Annualized): This measures the percentage change in total assets. While negative growth indicates the credit union is shrinking, excessively high growth can put significant strain on capital, liquidity, and operational resources.

• Loan Growth (Annualized): This measures the percentage change in the total loan portfolio. Negative growth shrinks the core earning asset base, while excessively rapid growth, if not well-managed, can lead to future asset quality problems and strain capital.

• Membership Growth (Annualized): This measures the change in the number of members. A declining member base can signal a loss of relevance, while very high growth can strain service capacity.

• Net Worth Growth (Annualized): This measures the percentage change in the credit union's net worth. Net worth growth is crucial for maintaining capital adequacy, absorbing potential losses, and safely supporting asset growth; a decline erodes this protective base.

• Share (Deposit) Growth (Annualized): This measures the change in total member deposits. While negative growth can create funding pressure, excessively rapid growth can strain the net worth ratio and pressure management to deploy the funds quickly, potentially into higher-risk assets.

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