Updated: Sep 2
With the third quarter in full swing, thoughts naturally turn to setting the annual budget for the coming year.
Budgeting is always difficult because foresight is not 20/20. Projections are usually based on past events, and while this is a sound-enough strategy in stable environments, it’s a much iffier proposition in times of uncertainty. Like now.
Worse yet, uncertainty is not coming from a single factor but from many. Community banks and credit unions are facing a severe talent shortage, multiple interest rate hikes, a possible recession, the lingering effects of covid, and even geopolitical crises as Russia’s war against Ukraine rages on.
Given our precarious economic environment, here are some tips for creating a sound budget for 2023:
Take inflation seriously.
Budgeting in an inflationary environment is notoriously difficult and forces community banks and credit unions to rely on uncomfortable levels of guesswork. When it comes to wrestling with inflation uncertainties, FIs are hardly alone. The National Federation of Independent Business (NFIB) says that in 2022, inflation was the top cause of anxiety among American entrepreneurs.
Inflation in the US slowed slightly this summer, but remains high. In July, the consumer price index (CPI) rose 8.5 percent year over year, a worrisome rate even if less dire than in June (9.1 percent).
Predictions for inflation, going forward, are not particularly rosy. In Bankrate’s Second-Quarter Economic indicator poll, 41 percent of economists expect inflation to come in as expected this year, and 29 percent think it will be higher than predicted.
Beyond building inflation into any budget, it also makes sense to have some cushioning in case scenarios play out differently than you thought.
Keep your eye on strategy.
Think of your budget as what allows you to make your strategy happen.
When considering how to allocate resources to new projects, make sure each has a clear ROI case. Each budget item should support the overall strategy of the organization.
Earmark additional funds for talent.
Financial institutions are facing a serious talent shortage. Last year, 78 percent of US bankers said it was harder to attract and keep talent than it had been in previous years, according to a 2022 compensation survey by Bank Director.
The budgeting implications of the current talent shortage are clear: many community banks and credit unions will need to earmark funds above and beyond former levels to locate new employees and retain existing ones.
“Banks almost universally report increased pay for employees and executives,” according to the Bank Director compensation survey. Almost half of banks surveyed believe that increasing pay has had an overall positive effect on their company’s profitability and performance, while 43 percent indicated a neutral impact.
For more information, see RiskScout’s blog post, “Staffing Headaches Grow with No End in Sight,” available here.
Invest in more robust controls.
“The best way for community banks to keep their profitability high is for their control systems to be working properly,” according to Cathy Ghiglieri, president of Ghiglieri & Company and a former Texas banking commissioner, who was quoted in the August 1, 2022, issue of Independent Banker magazine. She points out that banks lacking proper controls are subject to fraud losses, litigation expenses, and regulatory penalties.
The importance of paying for proper controls is not lost on today’s community banks and credit unions. In fact, the Bank Director compensation survey found that 29 percent of institutions surveyed plan to add compliance personnel this year.
Rethink the size of mortgage departments.
With higher interest rates, the mortgage refinance market has dried up and the rate at which new mortgages are being issued has slowed— two trends that show little sign of reversing any time soon.
In fact, interest rates are likely to continue to rise. Economists in Bankrate’s second-quarter poll predict interest rates will hit 3.25-3.5 percent by the end of 2022.
This dismal outlook for the mortgage function means that some FIs should consider cutting funding for marketing, new hires, and other expenses within this area.
Allocate money for crypto services and other types of innovation.
According to a recent survey by consulting and accounting firm Wipfli, 29 percent of 177 community banking respondents are expecting to add cryptocurrency services to their offerings.
This is one example of how community bankers, when budgeting, need to make sure they’re not just funding the same-old priorities, but are setting aside funds for the growth areas of tomorrow.
Take steps to prevent rapidly-escalating risks (think “cybersecurity”).
Cybersecurity is listed as one of the two top concerns among community bankers surveyed by Wipfli (the other is “employee recruitment/retention”).
The OCC recently came to a similar conclusion, noting that levels of cybersecurity risk remain elevated and should be addressed under the umbrella of overall operational risk.
Cybersecurity expenses fall disproportionately on small banks and credit unions. And in fact, financial institutions with under $500 million in annual revenues spent 11.2 percent of their IT budget on cybersecurity in 2020, according to a survey from Deloitte & Touche and the Financial Services Information Sharing and Analysis Center.
That said, cyber-crimes are on the rise and as a result, cybersecurity is something that all savvy financial institutions must fund amply to avoid costly and devastating attacks.
When budgeting for the year ahead, understand that even the best laid plans can go awry.
Increasingly, it makes sense to think of your institution’s budget less as a roadmap and more as a rough draft for what you expect might happen. Plan to be adaptable. Doing so means scheduling opportunities to revisit your budget at regular intervals so that you are positioned to respond to situations as they unfold.
https://www.gobankingrates.com/money/business/small-business-owner-how-to-survive-inflation/ https://abcnews.go.com/Business/july-inflation-data-show-latest-sky-high-prices/story?id=88109695 https://www.bankrate.com/banking/federal-reserve/economic-indicator-survey-inflation-july-2022/ https://www.bankdirector.com/press-release/bank-compensation-survey-results-findings-released-2/ https://independentbanker.org/2022/08/efficiency-now-8-smart-strategy-tips/ https://www.bankdirector.com/committees/compensation/compensation-survey-results-an-untenable-talent-climate/ https://www.bankrate.com/banking/federal-reserve/economic-indicator-survey-inflation-july-2022/ https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/cybercrime-stokes-costs-for-small-lenders-wrestling-with-online-banking-boom-67695527
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