When credit union executives look at their fourth-quarter income statements, they might be tempted to frame them and display them in the lobby.

They can expect a long wait until they have pictures quite that pretty again.

Economists have been scrambling to update and downshift their expectations for the economy and credit union prospects this year to keep up with the fast-shifting reality of the coronavirus' spread.

Forget yield curves. Forget savings versus loan growth. Forget weakness in business investment. Forget trade. Whatever their value in forecasting, the COVID-19 pandemic is overwhelming trends.

Stock values are bouncing. Whether that constitutes a bear market might depend on the latest day's closing, but in the realm of human activity, people are becoming bearish: More and more of them are hunkering down in their homes. Those traits are happening here and abroad.

How much things will slow and for how long, remains to be seen.

By mid-March some economists were saying a recession had already begun – but the economic indicators haven't had time to record it yet. Recently, the Fed slashed interest rates to near zero.

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 recession.

Among them were chief economists Steven Rick of CUNA Mutual Group and Mike Schenk of CUNA, both in Madison, Wis.

The next official joint forecast from CUNA and CUNA Mutual Group will be posted after economists from the organizations 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% this year.

Schenk said he expects GDP growth for the first quarter will be lower than its previous forecasts, and the second quarter will be "substantially lower."

"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 mild recession."

That picture assumes the coronavirus 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 challenged to adjust their operations to the pandemic's realities. At the same time, their net interest margins 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 examiners and supervisory personnel to clearly understand that you're doing this for a reason; you're anticipating 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 federally-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 undercapitalization 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 definitions 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 members.
• Large ($4 billion or more) have $557.5 billion in assets and 36.8 million members.

Even with the expanded definition of "small," the trend remains that return on average assets rises with size.

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 large ones.

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 year.

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 unions.

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 quarter.

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.