Budget Busting

Illustration: Getty Images / Gary Waters

Illustration: Getty Images / Gary Waters

Three trends changing forecasting and budgeting at community banks

By Cheryl Winokur Munk

As your community bank is likely in the throes of its budget season, you might notice that some things may be slightly different from a few years ago. Here are three concrete ways budgeting has changed, some community bankers, consultants and service providers say.

1. Budgeting is becoming more of a rolling process. Community banks are starting to move away from the idea that budgeting is a one-time event.

“It’s no longer strictly an annual process,” says Danny Baker, vice president and general manager for the enterprise performance management division at Fiserv Inc., a software provider in Brookfield, Wis. “Market dynamics and competitive pressures are changing faster, requiring more nimbleness in decision making.”

Instead, the better-run community banks are doing more extensive forecasting—at least quarterly—to take stock of how they are doing overall and where they need to devote more resources and what the timing should be, according to Kevin Tweddle, president of Bank Intelligence Solutions at Fiserv. Any blips in their expectations—due to economic changes, loan growth or interest rates, for instance—could cause them to rethink spending in other areas, particularly technology, Tweddle says.

Community banks have always forecasted for risk-management purposes, but they didn’t always do it for strategic decision-making purposes, explains Traci James Canterbury, a senior vice president at Community Trust Bank, a $3.8 billion-asset community bank in Ruston, La.

Every month Community Trust reviews its results to see what’s happening in its markets, and every quarter the bank reforecasts to know where it’s headed. “Banking is very dynamic,” Canterbury says. “Interest rates can change at any moment. The balance sheet can grow or contract at any time. We’ve organically doubled our asset size over the past five years, so we have to be nimble in our forecasting process.”

“Technology is becoming a greater and greater expense. We’ve grown quite a bit in the past five years, but our numbers of employees has pretty much stayed the same.”
—Chuck Morgan, Relyance Bank

Forecasting for strategic purposes allows the community bank to go in directions it wouldn’t be able to go if it was determined to stick to a static budget. “Without a forecast, management would be confined to achieving numbers on a piece of paper that were defined months ago that may or may not be relevant anymore,” Canterbury adds.

Forecasting is still a developing area and many banks can stand to do better, according to Bob Roth, managing director at Cornerstone Advisers, a bank consulting firm in Scottsdale, Ariz. “It’s easy to budget because that’s a planning exercise. It’s harder to keep that up-to-date every month as you go through the year.”

2. More detailed reporting through technology. Ten years ago Relyance Bank, a $560 million-asset community bank in Pine Bluff, Ark., used an Excel spreadsheet that had fairly broad categories for revenue and expenses.

“It’s gotten much better. Our systems allow us to dig down and break our information down into smaller and smaller parts,” says Chuck Morgan, the bank’s president and chief executive.

New software allows Relyance Bank to better analyze whether it is spending wisely and whether each business line is performing as hoped. If there’s a negative trend, the bank is better able to pinpoint where it’s occurring.

“It allows us to plan a lot better also,” Morgan says.

3. Technology spending is becoming a greater piece of the overall budget pie. For more community banks, technology spending is on the rise, as community banks try to emulate the operational capabilities and service delivery options of the largest banks.

“Technology is becoming a greater and greater expense,” Morgan says. “We’ve grown quite a bit in the past five years, but our number of employees has pretty much stayed the same.”

For example, Relyance Bank’s furniture, fixture and equipment expenses, much of which is technology related, rose to $1.745 million in 2014, up from $1.125 million in 2009—a 55 percent increase.

More than ever, however, community banks need to carefully consider how they allocate their technology funds and make sure they know what they’re getting for the money. “Banks have to be very wise and shrewd about their technology costs,” says Randy Dennis, president of DD&F Consulting Group in Little Rock, Ark. “You can spend a fortune and not have much when it’s all said and done.”

Cheryl Winokur Munk is a financial writer in Maryland.