Fed slashed interest rates to near
As of mid-March, a range of
economists were still predicting
growth to continue for the year,
with any drop in real GDP only for
one quarter – falling short of the
two consecutive quarters of GDP
contraction needed to define a
Among them were chief economists Steven Rick of CUNA Mutual Group and Mike
Schenk of CUNA,
both in Madison,
The next official
joint forecast from
CUNA and CUNA
Mutual Group will
be posted after
meet in late March.
As of March 11,
after WHO categorized the coronavirus as a pandemic, Schenk said
CUNA’s forecast for
economic growth for the year was
likely to fall to close to 1%, down
from its 1.8% forecast it made in
February before concerns about
the virus intensified.
At the same time, Steven Rick,
chief economist for CUNA Mutual, who will also weigh in on
the next forecast, said he would
expect growth to fall to 0.5% to 1%
Schenk said he expects GDP
growth for the first quarter will be
lower than its previous forecasts,
and the second quarter will be
“Then [there will be] a gradual
return toward normalcy, at least
for a couple quarters,” he said. “I
don’t know that we would go so
far as to project recession for the
year. For a lot of people it’s going
to feel like a recession, though a
That picture assumes the coro-
navirus does start spreading again
in the fall or winter.
NAFCU Chief Economist Curt
Long wrote a brief March 12 saying a “recession is a distinct possibility” as the worst economic effects of the spreading coronavirus
are felt in the second and third
quarters this year.
The brief, released March 16,
provides no clear update to his
last forecast from Feb. 25, when
concerns about the coronavirus
were enough for him to reduce his
expectation of real growth in U.S.
gross domestic product to 1.7% for
2020. He had previously forecast
GDP growth of 2% this year, down
from actual growth of 2.3% in 2019
and 2.9% in 2018.
Schenk said consumers are in
a better position to withstand a
downturn than in 2007, when the
Great Recession started. Home
prices have risen, but more gradually. Household debt is relatively
low when compared with income.
What’s more fragile is consumers’ role as the main driver of the
economic expansion that has now
lasted a record 11 years.
“There’s no question it’s going
to affect confidence, their willingness to spend money and make
big bets,” Schenk said.
For some households, a big bet
is buying a new house, and for
others, it’s replacing a car.
So what is Schenk advising
credit unions to do?
“I’m advising them to continue
doing what they’ve been doing, to
the extent they can.”
Credit unions will be chal-
lenged to adjust their operations
to the pandemic’s realities. At the
same time, their net interest mar-
gins will shrink as interest rates
near zero, he said.
Loan growth, last forecast at 5.5%
for 2020, is likely to grow at a slower
rate, and savings and investments
will grow faster than expected. And
loan delinquencies will rise.
“That means asset yields are going to be dropping,” he said.
All this adds up to subtraction,
Schenk said. Credit unions are
likely to use up some of the capital
built up in the economic expansion. The good news is that most
credit unions have net worth ratios that will allow them to do so.
“In this position, it’s better to be
serving members, than to be turning them away, even if it means
net income is going to come down
a little bit,” Schenk said.
“You want to be careful about it.
You want to budget for it. You want
to clearly document what you see
coming,” he said. “You want exam-
iners and supervisory personnel to
clearly understand that you’re do-
ing this for a reason; you’re antici-
pating any change in the net worth
ratio; but you’re planning to do it
because you have a strong desire
to continue to serve members.”
The net worth ratio for feder-
ally-insured credit unions was
11.41% at the end of the fourth
quarter of 2007, when the Great
Recession began. The ratio was
down only slightly from a record
high of 11.52% in December 2006.
It fell to a December low of 9.92%
in 2009, and rose gradually to its
high of 11.38% in December 2019.
While most credit unions have
plenty of net worth to buffer them
in hard times, those that show
stress from net losses or under-capitalization tend to be small.
But what is small?
When credit unions are ranked
and grouped into three classes by
asset size so that each class has
similar assets and roughly similar
numbers of members, the defini-
tions look like this:
• Small (less than $1 billion in
assets) have collectively $510
billion in assets and 46.8 million members.
• Medium ($1 billion to less than
$4 billion) have $517.3 billion in assets and 38.1 million
• Large ($4 billion or more) have
$557.5 billion in assets and 36.8
Even with the expanded definition of “small,” the trend remains
that return on average assets rises
That said, overall income actually declines as size increases.
Noninterest income plus net interest income (after loan loss provisions) was 4.42% of average assets for small credit unions, 4.15%
for medium ones and 3.73% for
But small credit unions lose
that advantage when their higher
overhead is factored in. Noninterest expenses as a percent of average assets was 3.77% for small
credit unions, 3.27% for medium
ones and 2.64% for large ones last
The earnings advantage of large
credit unions becomes apparent
when the expense ratio is subtracted from the income ratio to
show the return on average assets.
Small credit unions had net
income in the 12 months ending
Dec. 31, that was 0.73% of their
average assets – up 2 basis points
from a year earlier. ROA was 0.93%
for medium credit unions and
1.13% for large ones, both down 1
basis point from 2018.
Small credit unions dominated
the category of those with net
losses over the 12 months of 2019
– not only in number, but in the
value of the losses and their average assets.
Among last year’s 612 credit
unions with full-year net losses,
606 of them had assets under
$340 million, and five of them
were in the $340 million to under
$1 billion range – both roughly
equal-sized subsets of small credit
The 612 smallest credit unions
accounted for $72.6 million of the
total $172.3 million in losses, and
the next smallest group generated
$17.0 million in losses.
The remainder of the losses
came from one credit union:
Municipal Federal Credit Union
of New York City ($3.1 billion,
572,313 members), which ended
the year with an $82.7 million
net loss. Its loss was caused by a
special charge to earnings that
lifted its “Employee Compensation and Benefits” line by a whopping $129.3 million for the three
months ending June 30, 2019
compared with 2018’s second
Municipal has special challenges. The New York State Department of Financial Services took
possession of Municipal and appointed the NCUA as its conservator in May 2019, seven months
after its former President/CEO
Kam Wong was charged with embezzling nearly $10 million from
the credit union. In June 2019, he
pleaded guilty and was sentenced
to 5. 5 years in prison.
But even Municipal reported
full-year net income for 2018. All
302 credit unions with net losses
for both full years had assets under $1 billion.
And, except for Municipal, all
36 of the credit unions that were at
some level of undercapitalized as
of Dec. 31, 2019 had less than $340
million in assets.
Among the small, undercapitalized credit unions, 31 generated
net losses: A combined $8 million,
or - 1.36% ROA. Five of them had
$175,378 in net income, or 0.36%
ROA. The average net worth ratio
was 5.00%, compared with 12.13%
for all in its size sub-class, and
11.38% for all credit unions. n
CONT. FROM PAGE 1
Y Credit union results will get worse this year,
especially in Q2 and Q3.
Y Dodging a recession is still possible, but is
becoming less likely.
Y Credit unions will be challenged to adjust their
operations to the pandemic’s realities.