After a long tumultuous year, now is the time for credit union leaders to rethink where to go from here. Understanding that COVID-19 is not “over,” but looking forward to what comes next, is important.
There are a lot of topics on credit union leaders’ minds but they may not know how to start the discussion and frame their go-forward position. Here are ten topics to consider with the thought-starter questions that will help credit unions take the necessary next steps:
1. Identify and Keep the Good Stuff.
Credit unions implemented a lot of changes over the last year. Some things that were implemented very quickly at the onset of the pandemic have become part of regular operations at this point such as remote working arrangements for employees, scheduling personal interactions between employees and members, new cash management and investing processes, and many others. No matter what these policies are, consciously thinking about the changes to keep and incorporating those changes into permanent policies, employee training programs, personnel manuals, or even emergency response plans, is worthwhile. Three questions to frame the issue:
a. Have you spent time gathering input from stakeholders (primarily employees and members) regarding their opinions on operational changes?
b. Have decisions been made about which pandemic-initiated changes to “keep” post-pandemic been formally discussed and articulated or are these decisions being made informally and/or assumed without formal communication?
c. To the extent operational changes are likely to be adopted long-term, have policies and procedures been updated to reflect these changes?
Many credit unions have revisited strategy since the urgent reaction to the COVID disruption as well as to reconsider matters of equity, inclusion, and diversity. Strategies set in place before 2020 may no longer be practical and/or may be missing important elements because today’s reality is just different than the reality of 2019. If strategic plans have not been refreshed and updated in the last 12 months, make this a priority in 2021. Three questions to consider:
a. Has your credit union’s strategy been revisited in the last 12 months in a manner specifically designed to address the events of 2020?
b. Have changes in strategy been connected to operational goals in a manner that helps employees understand how day-to-day activities relate to strategic goals?
c. Have changes in strategy been communicated to stakeholders (i.e. employees and members) in a manner that will allow for meaningful reporting on progress in the future?
3. Electronic Channels.
Member adoption of electronic channels for interaction with credit unions accelerated in an unprecedented fashion in 2020. This presents both opportunities and challenges. The most oft-cited opportunities center around the ability to serve members more efficiently through these channels. Among the challenges, increased risk of fraud through these channels, data security, and increased competition. Credit unions have reacted to these changes in a variety of ways. Three questions to consider:
a. Have you properly defined who your competition is to include other service providers accessible through your members’ electronic devices?
b. Have you considered the adequacy of your overall staffing in the information technology space, including both having enough people resource to cover the volume of work and having people with the “right” skill sets?
c. Has your credit union reacted to the accelerated move to electronic channels in an organized, thoughtfully planned, and effective manner?
4. Employee Engagement.
The events of 2020 changed employers’ relationship with their employees in every industry. Most business leaders’ knowledge of their employees’ personal situation expanded out of necessity. It was suddenly mission-critical to understand which employees live with an elderly relative and who has school-age children. Many wouldn’t have considered these elements when making decisions about how to interact with employees until COVID-19 forced us to. Three questions about your response to this new reality:
a. Are you effectively managing your credit union’s culture in light of the changes in how your employees interact with each other?
b. Is formal and informal performance feedback happening effectively and is the feedback process effective for the continued development of your people?
c. Have your human resources policies and procedures been updated for the changes that have been implemented in the last year or so and/or the changes that you will adopt more permanently going forward?
5. Deposit Surge.
Credit unions have experienced a surge in deposits as a result of three main factors: unprecedented fiscal stimulus, a reduction of opportunities for members to spend money on things like travel, and a sense among consumers that having a savings cushion in a safe place like their credit union is a good idea given the uncertainties of this time. The growth of deposits over such a short period of time has caused some unusual challenges. Three questions about your credit union’s reaction to those challenges:
a. Do you need (and if so, have you) established a plan related to the negative impact this growth has had on your capital ratio?
b. Have you evaluated and can you articulate the impact this deposit surge is having on your noninterest income?
c. Does the credit union’s Board of Directors understand the impact of the deposit surge, the credit union’s reaction to date, and planned go-forward reaction?
6. Interest Rates.
We’re in a very low interest rate environment. The Fed continues to indicate that they plan to keep rates at this low level for some time. Obviously, we don’t know what the future holds. Understanding the impact that changes in the interest rate environment might have is critical. Start with three questions:
a. Does your credit union talk about expectations for rates going forward, and is the Board aware of these expectations and related risks?
b. Have you talked about the impact that the continuation of the current very low rate environment could mean for the credit union, and can you articulate your current response to that expectation?
c. Do you have a sense of what an increasing rate environment would mean for the credit union, and can you articulate how the credit union would respond to rising rates?
7. Loan Volume/Investing.
Significant deposit-driven growth has challenged every credit union to find a productive use for all the cash now on its balance sheet. Many credit unions have expanded investing and lending activities with the goal of finding a vehicle that will provide higher yield without adding significant risk. Other credit unions are simply sitting on excessively high cash balances in spite of the negligible yields on such balances. Three questions about your credit union’s approach:
a. Have changes in approach tomlending and investing activities (or perhaps the decision to not make a change in approach) been made after careful deliberation and consideration of long-term implications in the context of projected risks and rewards?
b. Are those deliberations and considerations documented?
c. Are changes in investing and lending approach consistent with documented policy and risk parameters, and if not, has a plan for policy updates been established?
8. Regulatory Environment.
The change in administration at the federal level may not impact the day-to-day activities of the credit union, but changes in Washington D.C. may impact operations over time. Broadly speaking, the current administration is expected to be more focused on consumer protections than the outgoing administration. Maintaining awareness of the direction of regulatory authorities as we move through 2021 is important so credit unions don’t get caught by surprise if/when regulatory changes occur. Three questions to consider:
a. Is management maintaining adequate communication/connection with industry groups
and regulators considering the absence of conferences and other traditional events where regulatory developments might be discussed/shared?
b. Is the credit union’s governing Board aware of and adequately updated on regulatory matters currently under consideration and their potential effect on the credit union?
c. Does the credit union have adequate resources to evaluate and comply with regulatory changes as they arise over the next 12 to 36 months?
9. Two New Accounting Rules.
It seems like everyone was talking about CECL for years before COVID-19 hit. Credit unions also had preparations for the new lease accounting rule on the agenda. In many cases, these projects were moved down the priority list in 2020 due to the need to focus on the pandemic. In some cases, preparation for these two new accounting rules has not resumed. It’s important to keep preparations for these rules moving forward since both of them could potentially have a material impact on the credit union’s financial reporting. Three key questions:
a. Has the credit union started CECL preparations including data analysis and determination of the need for an outside vendor’s assistance, has such outside vendor been engaged, and is there a timeline for CECL readiness?
b. To the extent the credit union has a CECL model in place, how did it fare during the 2020 disruptions and how can the credit union learn from that experience to improve the model going forward?
c. Have the credit union’s leasing obligations been identified and has the credit union established a plan for implementation of the new lease rule?
10. Risk Assessment.
Most credit unions employ a risk-based approach to internal audit and compliance functions. The disruption of 2020 and resulting changes in procedures, policies, and environmental risks make it imperative that the assessment of risk be revisited. Conducting audit and compliance work in “the same way we’ve always done it” is unlikely to be adequate under current circumstances. Ask yourself these three questions:
- Has the credit union’s risk assessment been updated for 2021 with input from members of operational management, senior management, internal audit resources, and the Supervisory Committee?
- Did the risk assessment update include specific consideration of the impact of changes implemented in the last 12 months?
- Is the go-forward audit plan reflective of the revised/updated risk assessment and are there specific elements that the internal auditors are addressing in a different way as a result of these changes?
While there are more topics or relevant questions that will be part of the conversation for credit unions over the next several months, these can serve as a starting point to help start the process for resetting the organization post-COVID and determining the best path forward.
Jeff Paille is a Partner at The Bonadio Group. He started his career at Bonadio, then spent five years at a multi-billion-dollar credit union, returning to the firm’s audit practice in 2006. This experience informs Jeff’s approach to client service; he sees the service plan from the client’s perspective and expresses financial results in an understandable and meaningful manner to both management personnel and board volunteers.