Calculated Lending


Budgeting for expanded lending starts with a strategic plan

By Katie Kuehner-Hebert

When determining what issues and factors should be particularly scrutinized in forecasting revenues and expenses for 2017, community banks should remember: They don’t have to succumb to all of the latest trends, bells and whistles if they don’t fit their strategic plan, some consultants say.

“One of the biggest problems we’ve seen is bankers just throwing money around, whether it’s mobile banking or within core processing or whatever,” contends Randy Dennis, president of DD&F Consulting Group in Little Rock, Ark. “More than ever banks have to have a direction with a strategic plan.”

For most every community bank, however, growing quality lending portfolios will be an important profitability goal. Opening loan production offices in other markets or starting a new Small Business Administration loan program could be moves to boost profitability, Dennis says. Property costs in possibly higher-priced commercial rental markets could drive the costs and direction of any lending expansion plan. Hiring and training new loan officers, including those with special SBA lending expertise, are other considerations. So would be the cost to provide additional back-office support to lending.

More obvious, offering residential mortgages to generate fee income should consider the budget implications of possibly raising more capital, says Jeff Voss, founder of Artisan Advisors LLC, a consulting firm in Barrington, Ill. Budgeting for potential compliance costs also would be an important consideration for a planned expansion of residential lending.

On the expense side, to counter aggressive competition from other small-business lenders, some community banks might consider providing some of their commercial borrowers with slightly lower interest rates in exchange for prepayment penalty provisions, Voss says. Some banks might consider such a competitive preemptive move next year, he says, to retain their best business borrowers, even as the Federal Reserve continues to try to raise interest rates.

If pursued, this tactic, however, should be reflected in their budgeting—and their strategic planning, Voss adds. “It all starts with strategic planning,” he says. “Before banks can dive down into [budgeting and forecasting] detail, they have to know what they want to accomplish.”

By Katie Kuehner-Hebert