6 ways the coronavirus has changed credit unions

Credit unions have had to scramble to adjust to the fallout from the coronavirus as it became widespread in March.

Employees at Jax Federal Credit Union now wear masks on the job to help protect against the coronavirus.
Employees at Jax Federal Credit Union now wear masks on the job to help protect against the coronavirus.

Executives had to quickly deal with a range of issues, such as ensuring that a large number of employees could work from home and figuring out how to offer loans through the hastily designed Paycheck Protection Program from the Small Business Administration.

And it's likely that credit unions will be dealing with the pandemic's affects through at least the end of this year. Credit quality could remain a concern as the unemployment rate continues to be extremely high. Some states are reporting a jump in coronavirus cases so second waves of the disease seem possible, at least for some areas.

Here is a look at six ways the coronavirus has changed credit unions so far and how the industry has responded to these unprecedented times.

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Pandemic scrambles credit union events
One of the earliest indicators of how widespread the pandemic’s impact would be was on the credit union conference circuit.

Many industry groups initially began by postponing conferences, delaying scheduled events by anywhere from three to six months. But as the pandemic worsened, many groups — including vendors, state and federal trade groups — have shifted their events to a virtual format. As of late June only one major conference left for the year — the National Association of Federally-Insured Credit Unions’ Congressional Caucus in Washington — is still scheduled as an in-person event.

But other Washington-based activities have already been curtailed and it remains unclear what impact that might have on the industry's broader advocacy priorities. Conference cancelations and shifts to online formats — which generally include a significantly reduced registration fee compared to live events — are also expected to be a major blow to many groups’ budgets.

It’s not just large trade shows. Required credit union meetings have also been retooled for the social distancing era, though there are indications that may turn out to be a boon. While members might not take the time to come to the credit union’s headquarters or a hotel ballroom for an annual meeting, some institutions have reported sizable increases in participation by live streaming those events.
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Staffing matters
The pandemic could change credit union hiring and staffing for years to come.

As branches began to close down or limit access in March and a majority of the industry moved to remote work, many institutions curtailed their hiring, putting most recruitment on hold and filling only the most essential positions. And those CUs that did bring on new employees often only had them inside a brick-and-mortar facility for long enough to get them set up with company laptops and online credentials before sending them back home to work.

As the outbreak came somewhat under control near the start of summer, however, credit unions in many states began reopening their doors to members, raising concerns about how to keep staff safe as branch traffic increased.

Many financial institutions and other businesses have instituted strict policies requiring the use of a mask or other face covering while on the premises as a way to protect employee. But some consumers have pushed back against those rules — along with some people who can’t wear masks for health reasons — often leaving management in a bind regarding how to enforce those policies without alienating members.

Some credit unions — including several of the nation’s largest — have also said they expect to see long-term staffing changes as a result of the pandemic. Chiefly, a number credit unions have indicated they’ll be keeping a sizable portion of their staff working from home for the foreseeable future. While that will help mitigate some health and safety concerns, it is also likely to create new challenges, including how to effectively instill organizational cultures, how best to collaborate when teams are dispersed and more.
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Branch landscape shifts again
The pandemic is likely to have an impact on credit union consolidation.

While the number of mergers slowed down somewhat in 2019, some institutions could find themselves in a tight spot if the recession brought on by the pandemic results in widespread job losses for their members. That could mean missed loan payments and declining earnings.

And while a number of credit union mergers have been announced since the pandemic began, many institutions have had to delay their votes to approve those deals or retool the voting process to reflect the need for online or mail-in voting.

Branch traffic was already on the decline before COVID-19, partly as a result of a decade spent pushing members toward self-service channels. If small credit unions — many of which operate facilities on the premises of their sponsor groups — are forced to close their doors in the wake of the new recession, that could result in a decline in the number of credit union branches. And with social distancing in effect and branch access limited in some states, credit unions have also begun rethinking their branch networks, including the possibility of shrinking their physical footprint.

For those locations that do stay open, staffing models are already changing. Limited in-branch traffic has led many credit unions to cross-train staff to serve in other roles that supplement their member-facing tasks. And with plenty of questions remaining surrounding the upcoming academic year — including how college campuses will function and whether K-12 schools will run on a normal schedule — there could be major changes coming for branches on campus and in schools.
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Preparing for lower earnings
Credit union earnings are taking a hit because of the coronavirus.

Though the National Credit Union Administration hasn’t released its summary of first-quarter income yet, a number of other indicators demonstrate that this year has been rough on the industry.

CUNA Mutual Group’s June Credit Union Trends Report, which uses April data, found that the average credit union return-on-asset ratio was 0.91% in the first quarter, down from 0.95% a year earlier, as interest rates fell and the loan-to-asset ratio declined.

The industry net income as a percent of average assets could be 0.4% this year, less than half of that number in 2019, CUNA Mutual Group’s report said. This metric could reach 0.1% in 2021, lower than the 0.18% posted in 2009, according to CUNA Mutual Group.

Provisions for loan losses were also elevated for many institutions in the first quarter as executives prepared for widespread credit issues. Navy Federal Credit Union in Vienna, Va., is one such institution. The $125.6 billion-asset institution – the world’s largest credit union by assets – reported that its provision climbed by 28%, to $504.5 million, from a year earlier.

The industry appears to have sufficient capital right now to withstand this decline in income and uptick in provisions. Overall credit unions have a net worth ratio of about 11% for the first quarter. That means the industry could lose roughly $66 billion in capital before falling below the well-capitalized level of 7%, according to data from Callahan & Associates.

Still, there could be some low-income designated credit unions that seek out to raise secondary capital to help boost their capital.

NCUA is also working to give institutions flexibility in dealing with declining earnings and net worth ratios. The regulator said earlier this month that adequately capitalized credit unions that are unable to meet earnings retention requirements won’t have to submit written applications to lower retained earnings.

Additionally, institutions that see their net worth ratios decline because of an influx of deposits related to COVID-19 can submit a streamlined net worth restoration plan, the agency said.
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Feeling insecure about unsecured lending
Credit union loan growth was already on the decline before the coronavirus took hold, though unsecured debt appeared one possible growth opportunity at the outset of 2020.

That has been tempered by the virus.

Credit card usage dropped substantially as states went into lockdown and consumers stayed home, limiting their shopping and embracing social distancing. Financial institutions also saw a surge in card-not-present transactions as consumers stayed home this spring, and that momentum has remained even as stay-home orders have lifted.

Recent data from CO-OP Financial Services showed credit and debit card usage beginning to rebound during the first half of June, but spending on travel and entertainment remains significantly below where it was this time last year.

As a result, it’s likely credit unions will see a sharp decline in card revenues, including interchange income as well as interest income on credit cards. That could pick back up if the outlook for the virus improves. But if unemployment worsens or a second wave hits later this fall and consumers are forced to stay home again for long periods of time, credit unions may finish 2020 far short of where they had hoped for this category.

Adding to the mix is uncertainty surrounding the future of signature loans. Credit unions have long used small-dollar unsecured personal loans as a differentiator, in part because many banks stayed away from them because of limited profitability. But as the pandemic worsened, some banks began offering them, raising concerns about how viable growth in that space might be for credit unions.
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Mortgages are booming but other lending areas are struggling
Mortgages have one been bright spot in an otherwise dreary lending environment.

Prior to the coronavirus, credit unions had been expecting a slowdown in mortgage lending. But at least in part due to the Federal Reserve lowering interest rates to essentially zero, credit unions have seen a rebound in this area.

First-quarter mortgage originations nearly doubled from a year earlier, according to data from Callahan & Associates. The industry’s market share shot up a full percentage point to 9% as a result.

“Growth is an understatement right now — it’s been record breaking,” April Gleason, vice president of lending at University Credit Union, previously told Credit Union Journal. “The last time we saw numbers like these was in the refi boom of 2009.”

However, other areas of lending have fared worse during the pandemic. For instance, some credit unions have pulled back in indirect auto lending as car dealerships reduced hours or were forced to close their doors entirely after being labeled non-essential businesses in response to the spread of COVID-19.

Credit card balances also declined by 1.2% in April from a year earlier, according to the June trends report from CUNA Mutual Group. Member business loans rose by just 0.7% in April year over year, after falling more than 13% in March from a year earlier, according to that report.

All of this means that some credit unions are scrambling to find ways to deploy the flood of deposits they are receiving from members. More institutions are even considering different types of investments, such as buying corporate bonds or utilizing charitable donation accounts.

“Deposit growth has been robust and loan growth is off,” said Bob Lindner, director of credit union business development at Madison Investment Advisors. “Because of that, we are seeing a huge increase in investable funds at credit unions.”