Widespread Pandemic: Learnings And Implications Evident In First Quarter Data

In the current environment, member circumstances and behaviors are changing. It is incumbent upon credit union leadership to monitor these changes and respond accordingly.

First quarter call report data provides an indication of how credit unions initially responded to the COVID-19 pandemic. Although the industry likely won’t realize the full impact of the crisis until 2021 or later, this early reading provides insightinto what to expect in the second half of 2020, including:

  • A record year for mortgage lending, primarily driven by refinancing activity. Origination balances in the first quarter of 2020 almost doubled first quarter performance from one year ago.
  • A lower loan-to-share ratio as consumer lending slows and share balances increase amid members conserving cash.
  • A negative impact on revenue from lower interest rates and reductions in non-interest income resulting from fee waivers and lower interchange income after a sharp drop in card transaction volume during stay-at-home orders.
  • A significant increase in provision for loan losses as credit unions buffer themselves against the economic fallout of double-digit unemployment. Most don’t expect to begin realizing losses until later in 2020 and into 2021 but do prefer toget ahead of potential issues.
  • A fall in net income from the combination of lower revenue and higher provision expenses.

Although the outlook is sobering, credit unions entered this year with a stronger financial profile than ever before. Asset and capital balances are more than double where they stood entering the Great Recession, operating efficiency is greater, and delinquencyis lower. Perhaps most importantly, member relationships are much stronger as measured by product usage and average balances.

In short, credit unions are positioned to respond to member needs with flexible and innovative programs. Staying attuned to member needs is how credit unions can demonstrate their difference. Member circumstances and behaviors are changing, and it isincumbent upon every leadership team to ensure it is monitoring changes and responding accordingly.

What Changes Mean For Credit Unions

The pandemic caused an unprecedented shift in activity and operations. Credit unions, like much of the world, quickly adjusted to a new reality as the pandemic spread. Within a matter of days, credit unions shifted employees to remote work, adjusted branchhours and services, implemented member relief programs such as loan deferments and emergency loans, and assessed the potential financial impact of the pandemic on members.

Now, credit unions are assessing what changes in member activity, employee engagement, and financial performance might mean for their organization moving forward. Leaders are making and re-evaluating decisions as conditions change and more informationbecomes available. They’re asking questions such as: Will some already-emerging trends accelerate? Will changes slow in some areas? Are some changes likely to become permanent?

If financial measures are down, but the credit union helped members navigate the crisis, shouldn’t that be considered a win?

Jay Johnson, Chief Collaboration Officer, Callahan & Associates

These questions can apply to a range of topics, including employees, members, communities, and financial performance. The answers are not evident; however, leaders need to reflect on such questions as changes occur and determine what the answers mightmean for the direction of the credit union. The answers, after all, could prompt adjustments in strategic or tactical priorities.

Thinking Through Lessons And Implications

Reflection is important, but it is difficult to ask the people focused on day-to-day operational issues to also consider the long-term outlook. As a result, some credit unions have asked specific members of the leadership team to stay on top of dailyissues while others evaluate the longer-term implications of environmental changes to the credit union. This approach ensures ongoing strategic dialogue as well as the ability to quickly respond to current member and employee dynamics.

What can teams do to evaluate the implications of the changes that have occurred in the past several months? First, they must capture what they’ve learned. Questions that address learnings include:

  • What have we learned about our employees and culture since we shifted to remote work?
  • What changes have we seen in our member interactions?
  • What have we learned about members’ finances that we didn’t know previously?
  • How much stress has this environment put on our financial model?
  • What has this environment told us about the needs of the communities we serve?

The answers to questions like these will evolve, so building a log of learnings, insights, and ideas is a solid approach. After documenting and reflecting on them, teams should periodically discuss the implications of these learnings, insights, and ideasacross different time frames, such as during the next year, during the next three years, and beyond the next three years. For example, some credit unions are thinking through working from home. How likely is that to continue through the next year?How likely is it to continue through the next three years? If so, what would that mean for hiring plans? What implications does this have for the credit union’s culture? What does it mean for investments in physical space?

Given the pace and significance of recent changes, leadership teams must take care to not react too quickly. Evaluating changes and their implications on a quarterly basis provides a good cadence. During these reviews, think through a range of potentialoutcomes and contemplate the likelihood that those outcomes could be realized in a considered timeframe. In many cases, just thinking through different outcomes prepares the organization for new possibilities. Consider, also, discussing these outcomesin the context of the current strategic plan to identify, and perhaps address, potential gaps in it.

Defining Success In This Environment

Reviewing the credit union’s success metrics to see how they align with the current environment should be another important component of these discussions. Many credit unions use a balanced scorecard to track strategic progress and success. If financialmeasures are down, but the credit union helped members navigate the crisis, shouldn’t that be considered a win? If so, does the scorecard capture it?

During the Great Recession, some credit unions began tracking not just loan originations but also how much those new loans saved members in interest. Such a metric puts the member at the forefront of the credit union’s labors. A credit union canonly be as successful as its members, so their success or how the credit union is helping them to succeed should be measured in some way.

This is an exceptional time in the world. We won’t know anytime soon what recent changes will mean for the future of our lives and business, but it is important to not overlook the ongoing learnings taking place. There have been and will be unanticipatedchallenges to address, but there also will be opportunities to capture. By thinking through the lessons today, credit unions will better position themselves to take advantage of opportunities as they emerge in the future.

June 22, 2020

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