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Strategic Budgeting for 2025: Key Considerations

By Katie Reiser

As banks across Wisconsin begin their budgeting process for 2025, it is a tumultuous time with uncertainty on many fronts. WBA interviewed three experts whose insights can guide bank leadership as they plan for the year ahead.

Augustine Faucher, Ph.D. is senior vice president and chief economist at PNC Financial Service Group. Faucher addressed WBA members during the 2023 Midwest Economic Forecast Forum. Look for more information in the PNC Fall Economic Outlook Survey.

Prepare for Slower Growth
Faucher cautioned that banks should expect slower growth in consumer spending and business investment growth, but still expects economic expansion, sharing, “I think we’ll see consumer spending increase, but at a slower pace than what we saw in 2023 and so far in 2024.” Faucher added, “banks need to be prepared for the fact that we may still see some softer demand for borrowing out there.”

“As the labor markets soften, we’re witnessing both smaller job gains as well as slower wage growth…I think we’re going to see more pressure at the lower end of the income distribution,” which Faucher explained is, “having more of an impact for low-wage workers and workers with less formal education.” But, he points out that upper income households are still benefiting from rising home values and stock prices that have been up over the past year, “I think higher income households are generally doing better, so retailers that are appealing to upper income households will hold up better than retailers focused on middle income or lower income households.”

Goods prices are down slightly over the past year, and Faucher points to progress over the last few months, particularly with less housing inflation. “We’ve seen a lot of supply come online in the multifamily market, and that’s slowing housing inflation,” he stated.

Commercial Real Estate Worries
Faucher underscored concerns about the commercial real estate market, especially the office market, “there’s a lot of debt that was rolled over from when interest rates were low in 2020–2021 that is going to be coming due.” This places stress on borrowers and office values are down from where they were before the pandemic. Said Faucher, “we just have lower structural demand for office space out there, so I think that banks should be prepared for distress in commercial real estate, in particular in the office real estate market.” He predicts that it will take time for that market to get through some of these structural issues and envisions a lot of ups and downs for another couple of years.

Fed’s Goals
Faucher believes the Federal Reserve won’t need to see inflation at 2% before cutting rates, stating “I think as long as we’re making progress there, we’ll see the Fed cut rates in September, maybe in November or December later this year.” He added, “but I think we will see, in particular, the short end of the yield curve move lower over the next year or so, with the Fed cutting fed funds rate and pushing down short-term rates.”

Marc Gall is senior vice president and asset/liability strategist, BOK Financial Capital Markets. BOK Financial Capital Markets is a WBA Gold Associate Member and specializes in balance sheet and investment strategy for financial institutions. Gall has been a frequent presenter at WBA seminars, webinars, and conferences.

Funding Balance Sheets
A challenge for banks will be looking at deposit rates. Gall asked, “If the Fed cuts interest rates, how much cost savings can banks reasonably assume, and how quickly can they assume that they’re going to get it?” Gall posed more questions for banks to consider, “what actions will banks need to take to reduce deposit costs? Is it going to be subject to whatever the rest of the market does?” For example, if competitors don’t start lowering rates on deposits and your bank still has CD specials at higher rates, will your bank aggressively move rates down and be an outlier, risking the loss of those deposits?

These are challenges from a strategic standpoint that management teams are going to have to figure out as they formulate their budget for 2025, because that cost side is going to be particularly important.

Yield Curve Pressures
As the front of the yield curve has inverted more, reinvestment rates on term loans and investments have declined from the beginning of summer. Gall suggests management teams take a hard look at loan growth assumptions for 2025: With a potentially slowing economy, where will loan demand come from? What loan rates are reasonable in this environment? With inconsistent pricing in the market, what growth and pricing strategy is best for our bank? Gall explained that many are feeling the pinch of margin pressures in 2024, but it might potentially get worse, or not get meaningfully better until significant movements from the Fed. “The initial 25 basis points or 50 basis points may feel like a movement in the right direction.” But, he warned, “the inverted yield curve is still going to be painful until we get that to normalize.”

Gall shared,“while the two-to-10- year part of the curve has uninverted or become more flat, we still have a huge inversion on the short end between zero and two years, which to me creates more of the margin pressure for a lot of community banks and it’s almost getting worse right now versus getting better. For many, margins will likely improve with a more favorable curve and time passing, allowing for repricing of legacy assets.”

Bank Term Funding Program
Some banks ended up utilizing the Bank Term Funding program from the Federal Reserve in response to the bank failures of early 2023, Gall explained, “with the attractive borrowing rate, call option and favorable collateral treatment, some of the banks that we work with borrowed or refinanced it in December or January of last year, which means those are coming due December 2024 or January 2025.”

Many banks will need to consider how they want to refund those borrowings, advised Gall, adding “Given the program isn’t currently available, a thoughtful, strategic funding plan will be critical for banks, incorporating current cost, diversification and contingency funding needs in the decision process.”

Frank Kelly, founder and managing partner Fulcrum Macro Advisors, will be the Keynote Speaker at the WBA Management Conference on September 24 in Green Bay. His presentation, The U.S. Economic, Financial, and Political Outlook 2025–2026, will provide more insights to use in budgeting.

Capital Rules, Cannabis, and Cybersecurity
Kelly described large banks’ efforts to stave off increased capital requirements, “there’s this question of ‘too big to fail’ that still lingers after the 2008 financial crisis,” which factors into the debate about Basel III minimum capital requirements. “It’s been one of the more brutal lobbying battles I have ever seen in my life, and I’m a fifth generation Washingtonian who grew up on this stuff.”

When asked to comment on how the election might influence regulatory issues, Kelly responded, “The first one would be the bank capital rules impacting the largest banks. If Trump wins, I predict that the federal regulators would probably stop pursuing it. If Harris wins, they will continue to press for it.”

A potential huge shift and possible opportunity for many banks is banking for cannabis, although, as Kelly pointed out, “it’s fraught with a lot of concern.” Kelly went on to predict that Congress may try a last-minute push to legalize cannabis banking this fall. Which as Kelly predicts, could then “be a very large business for banks of all sizes because they’ll be able to take the deposits, they’ll be able to make the business loans to them.” He likens it to the lifting of Prohibition in terms of new financial opportunities.

Kelly’s final issue on his “big three” list of issues for bankers to consider is cybersecurity. He points out that it is getting increasingly more perilous for every business, but particularly banks becoming a target of not just cyber thieves, but also foreign governments. He gave the cautionary examples of disruptions in Paris’ transit system on opening day of the Olympics and an elaborate deepfake video call netting scammers $25 million from a multinational firm in Hong Kong, even when employees had made efforts to avoid fraud.

Cyber criminals could target smaller banks in the heartland, Kelly warns, because “that will really shake people up more and create confusion.” Criminals and bad actors in foreign governments could reason, “don’t do it in the big cities where there’s always confusion… do it at a smaller, more vulnerable bank.”

Anxiety and Emotions
WBA spoke to Kelly on the morning of the dramatic market drop, and he remarked, “The market is very emotional, which is never a good thing in finance.”

“Inflation has really impacted folks. It’s very uneven around the country in terms of those feelings. Meaning some people think things are great, but there’s a lot of people with a lot of anxiety.” Fueling that anxiety is a lack of understanding about what’s going on politically and economically. Kelly reflected, “So much of the market is psychological and when people are feeling that anxiety, at some point it sort of bursts out.”

Look to WBA for More Information on Factors Influencing Budgets
While there are numerous complex considerations for banks as they work to create budgets that are resilient and adaptable, some factors are becoming more significant. Banks are expected to increase their technology spending with a focus on enhancing digital banking platforms, improving cybersecurity, and leveraging artificial intelligence (AI) for customer service and risk management. Other areas requiring a larger piece of the budget pie are wage growth and costs associated in upskilling or reskilling, particularly in specialized areas such as cybersecurity, data analytics, and digital transformation. WBA endeavors to keep members abreast of developments with these ever-evolving issues impacting budgeting and will continue to share informed insights, data, and best practices.

 

September 18, 2024/by Katie Reiser
https://www.wisbank.com/wp-content/uploads/2021/09/Triangle-Backgrounds_Lime-Green.jpg 972 1921 Katie Reiser https://www.wisbank.com/wp-content/uploads/2021/09/Wisconsin-Bankers-Association-logo.svg Katie Reiser2024-09-18 08:10:042024-09-18 08:10:04Strategic Budgeting for 2025: Key Considerations
News, Resources

It’s Still a Good Time to Become Financially Fit

The Wisconsin Bankers Association offers for your use the following consumer education column. Your bank is free to use this as a community column in your local newspaper, a letter to the editor, a press release or in any other way you see fit. The purpose is to give our members an easy-to-use tool for promoting the banking industry to Wisconsin’s communities.

New Year, New Me, right? We’re a few weeks into the new year and you may have dropped your New Year’s Resolution to become financially fit. Don’t despair. It’s still early in the new year and a great time to clean up your financials, adopt better spending habits, and start saving more. Here are a few tips to keep in mind:

Make a budget and stick with it
This almost cliché financial advice is repeated so often for one important reason: it works. Start by tracking your spending, once you’ve tracked how much money you spend over the course of a few weeks, you can look for trends in what you’re spending. These trends help you start planning on how much income goes towards necessities (like rent/mortgage, utilities, groceries), and see areas where you can cut back (rarely-used subscription services, eating out less) and start putting away a portion of your income towards a savings goal. The most important part of a budget is sticking with it, once you start tracking your spending you should make sure to take time every day or every few days to log your spending and compare that to your planned spending.

Deal with any debt
Debt is an extremely stressful thing to deal with but the new year is a time to get a handle on any debt that may have piled up around the holidays. Debt should be something factored into your budget like your electric bill and tracked. Although it may be daunting, contact your creditors to discuss your situation, they may be willing to work with you to put together a repayment plan. If you're carrying debt on multiple credit cards, talk to your local bank about the possibility of consolidating that debt into a single payment so you can close the extra card accounts. No matter what you do, addressing debt instead of ignoring it will help you get a handle on it and make positive progress.

Shop around
Many times people will stick with whatever they find first, be it their internet provider, car insurance, or brand of soup, but that may not be the best deal, especially a few years down the line. There’s nothing wrong with being loyal to a company but just because they’ve been your cable provider for a few years isn’t necessarily a good reason to stay with them and doesn’t ensure that you are getting the best value for what you are paying. Look around to see what other companies are charging for similar services, you may find that your current company is priced competitively or you may find that you can get a better deal elsewhere. One thing to beware of is a cheaper product or service that is cheaper for a reason, make sure you are still getting a similar quality or ask yourself if you are ok with a downgrade.
Making a commitment to financial health and wellness can be a great way to start the New Year on good footing that can last throughout the year and your life.   

An archive of Consumer Columns is available online at www.wisbank.com/ConsumerColumns. 

By, Eric Skrum

January 25, 2018/by Jose De La Rosa
https://www.wisbank.com/wp-content/uploads/2021/09/Wisconsin-Bankers-Association-logo.svg 0 0 Jose De La Rosa https://www.wisbank.com/wp-content/uploads/2021/09/Wisconsin-Bankers-Association-logo.svg Jose De La Rosa2018-01-25 08:58:502021-10-13 13:45:56It’s Still a Good Time to Become Financially Fit
Resources

Building a Better Budget

Accurate forecasts and transparency are keys to achieving bank financial goals

With 2017 just around the corner, many banks are deep into their annual budgeting process. However, projecting loan growth and interest rates is not as simple as it used to be, operational costs continue to rise, and interest margins continue to shrink… along with the budget's margin for error. "The cost of operations has continued to increase, and margins are shrinking. The challenge is how to manage and balance those out," said Scot Thompson, president/CEO of Denmark State Bank. Thompson participated in a recent national event hosted by the Conference of State Bank Supervisors and the Federal Reserve, and he says the message on interest rates was clear. "They said this is the new normal," he said. "The question is: what are we going to do today to make sure we can survive tomorrow?"

Despite the variables that will change the budgeting process from bank to bank, the key to generating a successful, actionable budget is combining accurate forecasting and transparency. 

Forecasting

The exact process for forecasting and establishing budget goals often varies by bank asset size. Larger banks ($5-$10B) tend to have a planning and budgeting committee led by the CFO and consisting of the major department heads. At smaller institutions, the CEO or president will be much more involved in the budgeting process. "The key, no matter what your size, is to involve the people in the major categories you're looking at, both income and expense," said Kevin Schalk, partner – Financial Services Practice at Baker Tilly. "These budgets become the goals for those departments, so it's imperative to involve the heads of those departments so you have buy-in on their goals." 

After establishing the budget-creation team, the next step is for management to determine which process works best for their institution. According to Marc Gall, vice president at BOK Financial Institution Advisors, there are two general methods used to generate a bank budget. "One takes the approach of using the strategic plan as a starting point to build the budget and the other is to start fresh with each budget," he said. "So, you can either start with broad numbers and work through it top-down, or you can start with all the pieces and figure out how to put them together." The primary risk with the top-down approach is the potential difficulty in getting buy-in from the staff responsible for achieving the goals set down in the budget if they were not involved in creating those goals. 

Another important step in accurate forecasting is to incorporate trend analysis in order to ensure accurate, achievable budget goals. "There are many times the bank will start with identifying the desire to grow the bank by X percent, but those goals might be too aggressive relative to what they've been able to accomplish historically," Gall explained. He recommends spending more time on the areas where, historically, the bank has the largest variance from previous projections, including interest rates. In addition to creating achievable goals, accurate forecasting also helps with risk management. "The ability to forecast is a guide to mitigate any significant unforeseen issues," Schalk explained. 

Transparency

The second key to building a successful budget is executing it throughout the year, a task which requires buy-in from everyone in the bank. "Everyone needs to have an awareness of looking for efficiencies and looking out for the best interests of the bank," Thompson explained. Frequent, transparent communication of the goals laid out in the budget is the best way to encourage that united effort. "You have to communicate those goals and get buy-in from everyone who is affected," said Schalk. "You need to be transparent and give updates on a quarterly or even monthly basis." That transparency also extends to how compensation and bonuses are tied to achieving budgetary goals. For instance, Gall noted that sometimes a bank may have two mutually exclusive goals – such as ROA and asset growth – so identifying the priority of each goal is critical. "Make sure the compensation structure and bonus goals are truly tied to the results the bank wants to get," he cautioned.

Transparency with staff at every level of the institution is also important, particularly when it comes to the importance of reducing non-interest expenses. "Invite the line staff to come up with ways to do something more efficiently and reduce cost," Gall advised. "Those small changes can have a large impact when taken in aggregate." As with transparency around compensation, all staff need to understand the specific goals of the institution to avoid concentrating on competing initiatives. For example, Schalk cautions against letting intense focus on income generation or expense reduction misdirect the bank. "You don't want to encourage a mix of products that is not in line with what the bank wants on the balance sheet," he said. "On the expense side, reduce repetitive processes versus reducing a person so you don't lose expertise." 

Once management has crafted a well-forecasted budget and communicated its goals throughout the institution, the final key to achieving those goals is frequent recalibration. "Variance to budget reporting is important," said Gall. "Look at those lines early in the year, because if you end up being way off budget early, it'll only get worse as time goes on without it being addressed." Thompson says that's why they reforecast every month. "There are variables that come up that will positively or negatively impact your year-end," he explained. "That's why we look at it on a monthly basis, so we can see where we're heading and take corrective actions throughout the year to have a better result." No matter how carefully planned and well-articulated, the bank's budget should never be so rigid it doesn't allow for adjustments. "In the past, budgets were more of a guide than set in stone, and that's even truer today with all the uncertainty," Schalk explained. 

Ultimately, the budget is a tool for management to use in achieving the bank's longer-term strategic goals. "The budget is a one-year focus that is a component of the strategic plan, which is usually a multi-year vision," said Gall. "However, just like strategic planning, it is important to be flexible. There may be many paths to achieve a single goal." Thompson urged bankers to keep in mind the goal of a budget: to make the organization stronger and better, even if that means making substantive changes. "Bankers like myself really need to look at why we would wait for another bank to buy us to do something that makes long-term sense for the bank," he said. "Is it something we could be doing ourselves right now?

A Bigger Piece of the Pie: Budgeting for Technology Expenses

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One of the biggest challenges banks face during the budgeting process is projecting technology costs. Current estimates from industry experts project 10 to 20 percent increases over what banks are currently spending, but there are a host of variables that can significantly impact that number. "It's a challenge to figure out what you're spending on all aspects of technology," said Gall, citing examples such as core conversions and adding new systems. "You need to make some very broad estimates if you're embarking on something new," he said. 

Part of the challenge with projecting technology costs is the variance between what customers see and what the bank needs to invest in on the back-end. Schalk explained that technology is divided into two components: customer-facing and behind-the-scenes. "The larger spend I see is the non-customer-facing pieces like cybersecurity and risk management," he said. "Some smaller institutions may be able to avoid the higher-end customer-facing pieces, but absolutely need the risk and cybersecurity platforms."

One way to bring costs down is to determine the right timing for your institution – not every bank needs to buy technology as soon as it is released into the market. "Technology is needed, but you have to balance it out," said Thompson, pointing out that new technology becomes less expensive as it works its way through the market. "The timing of when it's right for you as a bank will be different."

By, Amber Seitz

November 28, 2016/by Jose De La Rosa
https://www.wisbank.com/wp-content/uploads/2021/09/Wisconsin-Bankers-Association-logo.svg 0 0 Jose De La Rosa https://www.wisbank.com/wp-content/uploads/2021/09/Wisconsin-Bankers-Association-logo.svg Jose De La Rosa2016-11-28 08:45:002021-10-13 13:44:06Building a Better Budget
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