Financial institutions faced economic and market uncertainty head-on in 2020. Leaders worked to get ahead of liquidity issues, steer clear of harmful credit decisions, help ailing customers, and steady their organizations amid a staggering economy and extreme financial market volatility.

So, what have banks and credit unions learned over the past year?

  1. Profitability requires more attention. Historically low interest rates continue to drive margin compression, but the current environment has also yielded higher deposits, an active real estate market, and other opportunities. Institutions need tools to efficiently and accurately analyze value drivers to focus efforts that will drive margin.
  2. Agility is key. Institutions planned to move away from an annual budget in 2021 — 34% plan to use quarterly forecasts and 29% will use rolling forecasts.* Only 38% plan to use scenario analysis in 2021 — this is not surprising given the fairly labor-intensive process of traditional scenario modeling, which relies on manual analysis rather than efficient technology.
  3. Focus on technology and processes for change. Getting the right data at the right time is more critical than ever. Finance leaders expressed the need to have current data quickly aggregated and effectively communicated. The top initiatives* targeted for improvement in 2021 include budgeting and forecasting, “what-if” scenario modeling, and reporting and analysis to support decision-making.


Q&A with UW Credit Union

To better understand how top-performing institutions have leveraged these lessons learned, evolved their planning processes, and navigated the challenging road to recovery, we spoke with Glen Spaeth, VP and Controller at UW Credit Union.

How did you handle the unexpected challenges of 2020, and what were the results?

“As soon as we started moving to the remote work environment, we realized we needed to get a grasp on what was happening with COVID-19, the economy, and so on. Initially, we decided not to recast our budget but instead do a high-level pandemic forecast in early April 2020. We needed to get a sense of the severity and possible impact of the economic downturn and focused on delivering meaningful results quickly to mitigate risk.

“We focused on five main areas that we felt had the most impact on the organization's bottom line: margin, loan losses, gain on secondary market loan sales, interchange income/expense, and operating expenses. Once we wrapped our heads around the first four areas, it became much easier to figure out what we needed to adjust on the expense side.

“It was important to get the forecast done and approved as quickly as possible, so we worked with the board and senior management only, which allowed us to complete the process in less than a month. We began making adjustments as early as April. Analysis of many “what if” scenarios led us to shift our business strategy and put as many resources as possible — including excess branch staff — towards our first mortgage business.

“We eventually reforecasted the entire budget for the second half of the year because we saw that we could make up for a lot of our losses through the mortgage origination arm of our business. It was a labor-intensive process, but it was necessary to reset operating budgets and scorecards, guide management based on the new scenarios, and increase buy-in throughout the organization. Ultimately, we set new achievable goals, bearing this new economic reality in mind.”

Taking what you learned from 2020, how often should you forecast around different drivers? And at what level of detail?

“Typically, we take the annual business plan, and we forecast against most of our drivers to set annual targets and goals. We also do a mid-year forecast at a higher summary level to understand the impact of changing drivers rather than a granular look at the GL. 2020 was a unique year, and after the scenario forecasts were completed, we decided to recast the entire business plan and re-budget for the second half of the year. I hope that’s not the norm going forward, but I can rest easy at night knowing that we are equipped with the right technology to support ‘what if’ scenario modeling and can adjust our plans accordingly.”

How do you use scenario modeling at UW, and at what level of granularity?

“We run multiple scenarios through our Asset Liability model monthly, including changes in market rates and prepay speeds. The model runs at the record level and then aggregates for reporting. We then run the most likely scenario for the budget and project cashflows in Axiom at the record level to ensure that our annual budget and mid-year forecasts align. We also calculate scenarios in other parts of the plan, including interchange and loan losses.”

What advice do you have for your peers looking to improve their planning processes?

"You likely have a wealth of data at your fingertips; make sure you know how to tell the story. Data accuracy and the availability of detailed reporting for trending and storytelling are essential. Without those two pieces, we wouldn’t get the buy-in we depend on across the organization.”


The Key to Planning for Change

More than anything, the events of 2020 demonstrated the importance of agility and having the right technologies and processes to support planning, reforecasting, and adapting to current and future disruptions. As Glen and UW Credit Union’s journey proves, effective planning must be a connected process aligned to strategic priorities.

To determine where you are on your journey, consider three areas of planning evolution: budgeting and forecasting, scenario analysis, and data and reporting. Across all three, accuracy, efficiency, and data visibility to increase accountability are critical. Learn more about taking financial planning to the next level.

*Source: Syntellis’ 2021 Financial Institutions Finance and Technology Trends report

Your peers also read these resources: