WASHINGTON– If your credit union does scenario planning—and it should be, according to one CEO—and the planning involves just one thing, that CEO has some advice: “It’s never just one thing” and a CU needs to be prepared to “go really dark.”
Brett Martinez, president and CEO of Redwood Credit Union in Santa Rosa, Calif., shared with attendees at Mitchell Stankovic’s Underground meeting here that his CU does extensive scenario planning, which has helped it to respond more effectively and quickly to the unusually high number of challenges, especially natural disasters, it has faced in recent years.
But Redwood CU’s planning goes beyond just that, including the man-made challenges of potentially losing interchange and overdraft income.
“It’s a little hard to watch what's actually going on in the credit union industry, so, in in our credit union we tackle that through scenario planning, and we've been doing this for a very long time,” Martinez explained. “There's scenario planning for the financial stuff, which we do a lot of, and there's other types of scenario planning. When you're doing scenario planning you’ve got to get really dark. You’ve got to think about things that could happen.
‘The Reality’
“The reality is I've been doing this long enough that we're not guessing anymore,” Martinez said, noting his CU in Northern California has not only had to deal with the Great recession and COVID, lie other credit unions, but also flooding and fires on an almost annual basis.
He joked Redwood CU has planned for just every eventuality but locusts.
“People ask me all the time, ‘How do you make decisions so quickly?’” Martinez shared. “It’s because I already know the answer. I know what's going to happen. I know what the worst-case situation could possibly be. I know we'll be OK.”
Martinez said the management team takes the credit union’s board through all the scenarios so they know “we’ll be OK at the end of the day.”
“Right now, we got (threats to) interchange and overdraft protection,” said Martinez, saying he would advise smaller credit unions not to assume they are safe from any potential rules limiting overdraft fees.
‘It Will Be Tougher’
For the $8.6-billion Redwood CU, Martinez said overdrafts represent about $27 million in net income that could be lost, or about 20 basis points. Similarly, interchange represents around 24 basis points of income.
“First of all, we'll be fine, but it'll be tougher,” he said. “We also have 87% checking penetration, so the impact on those two things to our core business model is substantial. For those of us who have been around for a while, seeing Congress do anything that impacts financial institutions, all it does is move the cheese. In our organization we're trying to figure out where the cheese is going.”
In monitoring the journey of the cheese, Martinez said Redwood CU has done financial modeling of the top 30 regional financial institutions and some of their pricing and product decisions.
The Cheese is on the Move
“We started really just diving into their numbers and looking at the non-interest income impact and are trying to figure out what changes they're making, because banks aren't going to just take less income, it's going to move somewhere,” Martinez said. “So, here's what we found. We still have a long way to go on this scenario planning and trying to figure out where the cheese is moving. Their wealth management services have increased significantly. They're very focused in on wealth management.”
Martinez said the other thing has found interesting is the big banks are “growing interchange substantially, so that's not good news for us if the big banks are growing interchange. But the reality of what's happening is they have variable-rate portfolios, so their non-interest income has been going down and their interest income is shooting through the roof. They haven't felt the impact yet.
“So, my take is the cheese hasn't moved because they don't need to yet, but as rates start going down it's going to move and they probably don't want to be the first,” Martinez continued. “But somebody's going to have to do it.”
The Layering of Scenarios
Martinez reminded that when it comes to scenario planning, no credit union can plan for just one scenario and call it a day. That’ s especially true as regulators layer on new rules.
In Northern California where residents and employees have had to deal with so many devastating natural disasters on top of the other challenges life throws at them, he said there has been both a financial and a mental impact.
“We do a lot around financial education and financial health, but we've also really focused in on the mental wellness,” Martinez said. “We have people that come in and help our team with the mental impact of helping all those people that are impacted.”
That has included creating vides for students from fifth to 12th grade to educate them and to help them through the mental aspects of all they have had to deal with.
What to Think About
Credit unions everywhere need to be thinking about those scenarios and more, Martinez said.
“I think a lot of us think about one thing” overdraft protection or interchange,” he stated. “So, what about overdraft protection and interchange. What about overdraft protection and interchange and credit union taxation. I've been planning for credit union taxation since the day I took over as CEO. I hope it doesn't happen, but I know that we're going to survive through. I can survive through all three of those. Now, throw in a significant recession on the top of that and we're in trouble. That's that layering effect. It's never just one thing.”