Each year during the fall, community banks start thinking about budgeting for the next fiscal year. Some institutions develop aggressive strategic plans; but they neglect to budget appropriately for the implementation of their strategic objectives. Therefore, you must align the budgeting process with strategy. Doing so is crucially important to ensure your institution implements the strategic plan.

There are three key areas that leadership must focus on when developing their strategic plan: growth, profitability, and capital deployment.

Let’s address each area of focus from a strategic perspective and how to align the budgeting process with strategy.

Growth:

The first question to address is: Why do you want to grow the institution? The obvious answer is twofold: 1) to stay competitive and 2) because if you’re not growing, you’re shrinking! But there may be other reasons such as expanding geographically to new territories. Or you want to offer new products and services or reach new target markets. Whatever the reason, you must find the answer and be able to describe it to your shareholders, customers, and regulators.

The next important question is key: How do you plan to grow the institution? The “how” represents your strategies to grow the institution and there can be multiple strategies.

Below are examples of growth strategies:

• Expand into specific territories (name them) or markets to attract new types of customers.
• Hire the right new talent with specific sales skills and experience to go after bigger business customers.
• Update our technology to be able to scale and support the increased number of customers. (The technology can include everything from the core system to a new Customer Relationship Management (CRM) system to AI integration. And there is always the ongoing investment in cybersecurity technology to protect your institution from cyber-attacks.)
• Create a new division of the company to offer new services to existing and new customers. Examples could be Mortgage, Treasury Management, or Private Banking.

Each of these strategies must have its own budget. Then you can perform a cost-benefit analysis to decide which ones to implement and in which order. Also, ensure you implement marketing strategies that support your strategic objectives for growth. And include the cost of each marketing strategy in the overall budget too.

Profitability:

As you identify your strategic objectives for the new plan you must align the budgeting process with strategy. For your institution to be profitable, the budget must show a net income after all is said and done! This is what the owners/shareholders will hold leadership accountable for… the bottom line.

Sometimes community banks leave money on the table and don’t charge appropriately for their services. Often, they give certain services away (i.e., Treasury Management) for free thinking they need to do that to stay competitive. However, in the end, they need to be a profitable business to succeed. And there are many ways to increase profitability.

Below are some examples of strategies to increase your profitability:

• Consider integrating AI into existing processes wherever possible. By increasing efficiency, you reduce expenses and/or increase profits depending on how you choose to use AI.
• Maximize the current technology that you’re already paying for. Often, the software solutions you purchase or subscribe to have multiple features that you’re not using. Learn about all the features before you purchase any additional solutions.
• Perform a cost-benefit analysis on each major initiative that is an identified strategic objective in your strategic plan. Ask this key question: Is this initiative going to be profitable? If yes, by when? The timeline needs to be recorded and be part of the budget. If not, then why are you doing this? Occasionally, there may be an initiative that you decide to pursue knowing that it will not be profitable. One example is to open a new branch as a “deposit source” that may not be profitable for a while.
• Ensure the main goal of your marketing strategies is to create sales leads which in turn result in sales that produce a profit for the business.

Again, each of these strategies must have its own budget. Some strategies, especially technology ones, may require an initial large investment and you won’t see “the fruit” for a while. And that’s okay as long as everyone understands the end goal.

Capital Allocation:

Every business starts with capital – however small. And every business needs ongoing capital to survive. When a company, regardless of size, runs “in the red,” (meaning they have a net loss), they’re “eating the capital.” There are four principal ways to raise capital: 1) Get investors to invest in your company which means you now share the ownership; 2) You inject your own money which may deplete your savings; 3) Obtain a loan which brings the interest expense and eventually the need to pay off the loan; or 4) Retain the earnings of the company. If your bank is owned by a Holding Company (HC), then the HC can obtain a loan and inject capital into the bank. However, the bank still has to pay interest to the HC.

The first question is then how do you plan to raise capital? The next key question is: How are you going to deploy your capital? For example, are you going to invest it in new technology or hire new talent or upgrade your website? If you invest in technology, will it be to protect the company from cyber threats or to increase efficiency or to offer new products? Sometimes you need to allocate capital to improve your company’s infrastructure. You must be specific as to how exactly you will allocate your capital. Ideally, you allocate capital with the goal of producing growth and profitability.

Below are some questions for your company’s leadership to answer to arrive at strategies to allocate your capital:

• Think long-term. Which initiative will produce long-term profitability while supporting the growth of the organization?
• If one of your strategic objectives is to expand geographically, is it better to invest capital in a new physical location? Or could you achieve the same results with an online presence?
• Will investing capital in your website redesign and marketing strategies result in net new sales in your local city and State? Or do you just bring your website up to date?
• Would hiring a superstar salesperson increase sales or would it be better to invest in training your current staff?
• Can the new product you want to offer be sold to most of your customers or is it just for a few? If you only sell it to a few customers, will the product still be profitable?

As you can see, there are multiple critical questions you and your leadership team must answer before identifying the strategic objectives. Each objective then must have strategies on how to accomplish them and the cost associated with it. That’s how you align the budgeting process to strategy.

I hope these ideas help you in your budgeting process for next year as you conduct your strategic planning sessions.

As summer begins, bank leaders are already looking ahead and starting the important conversations that will shape next year’s strategic plan. For community banks, strategic planning is no longer just about setting goals. It’s about identifying the priorities that will help the institution remain relevant, competitive, and financially strong in a rapidly changing environment. The most effective plans address the issues that are both urgent and foundational. Leadership continuity, deposit growth, fee income, technology, cybersecurity, enterprise risk management, and long-term growth. These issues make up the top five strategic planning objectives we see most community bank’s strategic plans.

Looking for more information on Strategic Planning? We’ve got you covered. Browse our Strategic Planning information page, view the next Strategic Planning webinar or contact us for help in facilitating your next planning meeting.

These issues then become a strategic objective in the strategic plan, so they get done. Otherwise, they are only conversations that keep getting pushed into the future. If you are developing your next strategic plan this fall, consider these top five objectives and ideas to accomplish them.

Top Five Strategic Planning Objectives

Succession Planning – the leadership is getting older!

It is not a secret that the leadership of community banks is getting older. Somehow, the young team that started working together years ago are now thinking of retirement. So where do you start?

There are two critical components to succession planning:

First, you need to write down your succession planning process. The process should include how you identify employees who are retiring and their potential successors. Describe how you identify emerging leaders and high potential/high performing employees. Then describe how you communicate to the potential successors, so they know they have a future in the company. The next step is to create a Personal Development Plan that includes training on the knowledge gaps. This training must also include any “soft skill” gaps identified and mentoring opportunities.

Second, you develop a succession plan for each leadership or key position at the bank. The succession plan should include the tasks and functions that the successor will take over eventually. Each task or function must have a timeline or date when it will be implemented. The plan should include who is involved in the transition of responsibilities and how it will be done. Track when each activity is completed and communicate with leadership (or the Board for the CEO transition) as appropriate.

It is critical for all community banks to always have a formal succession planning process and a plan. This is a dynamic document that changes as people retire and/or if the potential successors leave before transitioning to their new position. This is an HR function, and unfortunately, many community banks don’t possess the knowledge to do it. Also, even if HR has the knowledge, they cannot do it on their own. This is a collaborative effort between HR and the management team.

Implement Treasury Management to increase business core deposits and fee income.

It is rare to hear a community bank say they don’t need deposits. If you’re in that position, congratulations. You are the exception. Most community banks are seeking low-cost, business core deposits to combat the Net Interest Margin (NIM) compression. The other objective banks want to accomplish is to bring new fee income. Most banks need new non-interest income, again to fight the decreasing NIM battle. The answer?

Multiple strategies exist. But community banks that want to increase deposits and fee income desire to implement or formalize their Treasury Management department. How do you get started?

If you’re starting from scratch with few TM services offered and no staff to sell or support, then you need to establish the infrastructure which includes:

Staffing:

You need at least three people. One to sell TM services, one to implement and support the services, and one to open accounts. Initially, these can be a “hat” for someone’s job. However, once you start selling services, it takes dedicated staff and technology to service your customers.

Technology:

You must establish a strong systems infrastructure. These include your core system, online banking platform, and account analysis system. These three systems must integrate well amongst themselves and also with other TM services providers.

Processes:

Once the infrastructure and the staff are ready, then you need to establish your sales and onboarding processes. You also need to have a process for ongoing support and maintenance, to retain your TM customers.

Training:

Lastly, once everything is set up and ready to go, you must train your entire staff. The branches need to learn about TM to refer businesses to the Treasury Management Officer (sales). The TMOs must understand all the TM services to sell and cross-sell them. The TM Support team must learn to implement and support all the services. The TM Operations team needs to understand how the TM services operate to solve any issues. Business Bankers (lenders) are the main referral source to TMOs, so they need to learn to identify when their loan customers need TM services.

Most community banks have some of these components and just need to formalize the department. In that case, you need to ensure you train everyone involved in the sales, onboarding, and support processes. The team needs to know “who does what” in the entire customer journey – from prospecting to onboarding to ongoing support and maintenance.

Stay on top of technology – both for innovation and to enhance cybersecurity mitigation.

When we conduct an ERM Risk Assessment, undoubtedly, cybersecurity is always one of the top three risks for most community banks. Regardless of how strong your IT Security and Cybersecurity Programs are, you cannot rest. Banks must continually invest in technology to combat cyber incidents and fraud that can originate from third-party providers.

Currently, banks are brainstorming on how to integrate AI into all areas of operations in a “safe and sound” manner. Employees already started using it, so institutions must catch up and establish their AI policy immediately. The key is to tell employees what is not allowed and the consequences for violating the policy. Then add a “dynamic” section to add allowed tasks as your bank learns how to use AI safely for various functions.

Additionally, community banks must stay on top of technology to innovate and gain efficiency. Besides AI integration, another reason banks are including technology in their plans is to maximize their current technologies across the board. There are a lot of software and core capabilities that banks are paying for and are not using. Therefore, maximizing current technology is a great strategic objective for banks to pursue.

Formalize Enterprise Risk Management – regardless of asset size.

Often community banks fear that implementing or formalizing their ERM Program will attract the examiners’ attention. And it’s on the contrary. Having a formal ERM Program regardless of your bank’s asset size is part of the “M” in CAMELs rating. The examiners want to ensure that the Board and leadership understand their risks (in all risk categories). They want to make sure you know your top risks and are mitigating and monitoring those risks. In short, you know your bank’s top risks and your leadership is managing them all.

There are other benefits to having your ERM Program formalized too. By forming your ERM Committee, the silos dissolve. Everyone learns about the risks in each other’s areas. And they understand that the bank can fail if any area is at high risk without the proper mitigating strategies. Therefore, it builds the team. You also discover inefficiencies across the bank, so it gives you the opportunity to improve all around.

You formalize your ERM Program when you have these key components in place:

ERM Policy, internal ERM Committee and Charter, Board Risk Committee and Charter, designated Risk Officer, Board Appetite & Tolerance Statement, and ERM Risk Assessment. You are already conducting hundreds of other risk assessments. But one you may be missing is the high-level ERM Risk Assessment where you assess each risk category.

Grow – assets, loans, deposits, market share, geographically – to survive.

Lastly, community banks are on a mission to grow. Regardless of how old your bank is, you need to grow. Your bank must compete in bigger markets and with non-banks/Fintechs that provide the same services you do without regulatory burdens. Customers, even in rural areas now request more technology capabilities through their online banking. Small businesses want more accessibility to their accounts and faster payments.

The reason why “growing” as an objective is important is because if you don’t have it as a goal, your bank will shrink. Banks are now exposed to losing depositors and loan customers, at any time. Therefore, one of the strategies should simply be to “retain customers at all costs.”

The bank’s executive management together with the Board Directors must lead the effort and provide strategic leadership to the institution. As you start your strategic planning process, consider these top five strategic planning objectives. Identify strategies to accomplish these important objectives and include the entire staff.

Strategic planning is more than an annual exercise. It’s the opportunity to turn important conversations into clear priorities, measurable action steps, and accountability across the organization. Whether your bank is focused on succession planning, treasury management, technology, enterprise risk management, or growth, the key is to be intentional and proactive. Community banks that address these top five strategic planning objectives now will be better positioned for the future. They’ll be ready to serve their customers, support their employees, and strengthen their risk management practices. Additionally, they will remain competitive in the current financial services environment.