Budgeting Like an ALCO: Rethinking the 2027 Budget
With the final quarter of the calendar year upon us, one of the biggest tasks for bank and credit union finance teams becomes developing the budget for the upcoming year.
Given the uncertainty surrounding the path ahead, coming up with one set of assumptions to feel confident in can start to feel like an impossible exercise.
This got me thinking: no ALCO committee that DCG works with would feel comfortable evaluating its interest rate risk position if the ALCO report relied on only one rate scenario. So why do financial institutions still build budgets that way?
If ALCO committees rely on multiple rate scenarios, varying cash flows, and different loan and deposit pricing assumptions to understand how the balance sheet may perform across a range of outcomes, perhaps it’s time to start treating the budget more like an ALCO model.
From the Editor
Did you know that virtually every time an NFL team huddles before the snap, they call multiple plays in their huddle? Typically, one is a running play, and the other is a pass option.
The quarterback’s primary responsibility at the line of scrimmage is to assess the defensive structure that the opponent presents, and to call the play that has the greater chance of success.
If I were running a financial institution today, I would have two sets of 'plays' ready for 2027. Clearly, there are compelling cases for BOTH rising and falling interest rates in the future.
So, if I’m thinking about the best way to attack 2027, I must insert some flexibility into my strategy. Fortunately, in this month’s Bulletin, DCG Managing Director Ryan Gilles writes about treating the financial budgeting process in a similar way.
Specifically, Ryan asserts that the budgeting process should be analogous to the IRR modeling process with multiple scenarios. He believes that it is imperative to “Know Your Moves Before You Need Them,” and that ultimately the goal is to “Be Prepared, Not to Perfectly Predict What Will Happen.”
Ultimately, it’s anyone’s guess what the economy and industry ‘present’ to us next year, but Ryan’s timely article should help position your team for success in 2027.
Vinny Clevenger, Managing Director
The “Base Case” Is Just the Starting Point
When thinking about an earnings-at-risk simulation, DCG always starts with a base case scenario that assumes the institution operates in the current rate environment for the next several years. While we know that is extremely unlikely to occur, it establishes the baseline from which we can evaluate how changes in interest rates and other assumptions may impact earnings and sensitivity.
Taking a similar approach with the budget can help establish assumptions based on what is known today, rather than relying too heavily on a vision of what the environment may look like tomorrow. The potential danger in having only one iteration of a budget is that the base case can gradually begin to feel like the expected outcome.
But if the budget misses on a few key assumptions – growth, pricing, mix changes, or interest rate movements – the combined impact can lead to a materially different earnings result. The key is recognizing that precision is less important than understanding how sensitive the budget is to changes in those assumptions.
Taking an IRR Model Approach
With IRR modeling, we go beyond simply running a base case or evaluating what happens if interest rates follow the expected path. We run multiple scenarios to better understand where the greatest potential risks and opportunities may exist.
Why not apply the same concept to the budget?
Start with the baseline scenario, then run a few alternatives such as incorporating current futures market expectations, assuming rates move higher than anticipated, and possibly even one that assumes the Fed reverses course.
Based on recent experience, a continued rising rate environment could once again create demand and pricing challenges on the asset side while increasing competition, pricing pressure, and potential mix shifts on the deposit side.
By treating the budget more like an interest rate risk model, management can gain a much better sense of the potential range of outcomes depending on how the operating environment unfolds throughout the year.
Identifying the Assumptions That Drive the Results
To make this exercise effective, the focus should be on the handful of assumptions that have the greatest impact on performance: loan and deposit growth, loan and deposit pricing, asset and funding mix, operating expenses, and the sources used to fund balance sheet growth.
Once those variables are identified, the next step is to determine how they may behave under different economic and interest rate environments.
If rates follow market expectations, or move even higher, loan demand may weaken, deposit competition could intensify, funding costs may remain elevated, and deposit mix could continue to shift. Credit could also become a larger consideration as borrowers operate under higher financing costs for longer.
If the Fed reverses course and market rates decline, the challenges may look very different. Loan demand could improve, but prepayment activity may increase. Institutions may also have to decide how aggressively they want to lower deposit costs versus prioritizing balance retention. At the same time, stronger loan pipelines could create new liquidity and funding needs.
The purpose is not to model every possible outcome. It is to understand how the assumptions that matter most could change, and how those changes could flow through earnings, liquidity, and capital. Communicating that range of outcomes to the Board can help set clearer expectations around earnings, liquidity needs, capital capacity, and strategic priorities as the year unfolds.
Know Your Moves Before You Need Them
Once you understand how the key assumptions could change, the more important question becomes: what would you do about it?
Take loan growth. If higher rates result in weaker demand and you begin experiencing loan contraction, how will excess liquidity be deployed? Would you be open to loan purchases? Would increasing the investment portfolio make sense to take advantage of attractive yields and put cash to work? Would you reduce your reliance on wholesale funding? Running that scenario ahead of time helps management understand how it could offset the earnings impact of slower organic growth.
The opposite scenario matters just as much. If rates fall and loan demand improves materially, do you have enough liquidity to support growth above the base case? Could investment cashflows be redirected into loans? Would additional deposits or wholesale funding be required? Understanding the answer before the pipeline accelerates provides considerably more flexibility.
Deposit strategy is another good example. If rates rise further, recent experience can provide valuable insight into how deposit customers may react, what pricing levels could be required for retention and growth, and where mix shifts or balance volatility could occur. If rates decline, the strategic question changes: what are your tiebreakers or priorities when balancing cost savings against deposit retention and growth?
By incorporating these types of alternative scenarios into the budgeting process, the budget can be more than an annual financial target. It becomes a decision-making tool, helping management teams prepare for choices they may need to make before they are forced to make them.
The Goal Is to Be Prepared, Not to Perfectly Predict What Will Happen
The goal of the budget should not be to perfectly forecast what may happen in 2027. It should provide a roadmap and a game plan for how your institution can respond as the environment changes.
The institutions that perform the best are not necessarily the ones that get every budget assumption exactly right. More often, they are the ones that understand how their balance sheet and earnings could behave across multiple scenarios and have plans in place for how to adapt when conditions change.
The bottom line: the value of the budget is not in proving that management or the finance team can predict the future. Its value lies in helping your institution understand how to perform across a range of possible outcomes, especially when the environment 12 months from now may look very different from what anyone expects today.
For more insights from Darling Consulting Group, click here.
Ryan Gilles is a Managing Director at Darling Consulting Group, where he works with community financial institutions throughout the U.S. to solidify and enhance balance sheet management. In this role, he works collaboratively with executive teams and ALCO committees to help develop and implement tailor-made strategies related to interest rate risk, liquidity, and capital while prudently managing risk to optimize earnings and satisfy regulatory compliance.
Ryan began his career at DCG in 2013 as a financial analyst after graduating from Assumption University with a B.A. in Accounting. He currently lives in South Boston with his wife and young sons.
© 2026 Darling Consulting Group, Inc.
