Every fall, financial institutions go through the same ritual: projecting loan growth, setting funding goals, and building next year’s budget. But too often, the process leans more on optimism than analysis. The result? Budgets that miss plan within the first few months of the year.

In dozens of client planning sessions and the Loans360°® Cross-Institution dataset, DCG regularly sees five common pitfalls that undermine the loan budgeting process. Here is how to help avoid them.

1. Using Last Year’s Growth as This Year’s Target

Too many institutions start their planning with a simple carryforward of last year’s results. But portfolio growth is not linear; it’s the product of origination volumes, curtailments, and prepayments that change dramatically as rates shift.

Using last year’s growth as a benchmark overlooks how quickly portfolio dynamics can change. A modest rise in prepayments or line utilization can turn a 4% target into a 7% funding challenge almost overnight. Institutions that don’t revisit the drivers of growth (cashflows, origination capacity, and borrower demand) often find their budgets misaligned with reality before the first quarter is over.

Suggestion: Move beyond static growth targets by building a cashflow-based growth bridge for each major loan segment. Start with expected runoff and scheduled amortization, then layer in origination pipelines, historical conversion rates, and expected pricing spreads. From there, calculate the origination volume needed to maintain or grow balances under different prepayment scenarios. This method links growth planning directly to operational capacity and market conditions, turning the budget from a wish list into a funding roadmap.

2. Ignoring the Composition of Runoff

Loan runoff isn’t random. Higher-coupon loans are more likely to prepay, which means the first balances to disappear are often the most profitable. When budgets assume an even runoff across the portfolio, they underestimate the hit to margin.

DCG data shows that 30% of balances with above-market coupons are projected to account for nearly half (48%) of total prepayments next year. That dynamic should factor directly into both loan growth expectations and margin forecasts.

Suggestion: Analyze expected runoff by rate tier or coupon band to identify which parts of a portfolio are most at risk. Incorporate this insight into both volume and margin projections so the budget reflects not just how much will run off, but what will run off.

The table below illustrates how the Loans360° Instrument-Level Prepayment Model projects faster prepayment speeds among higher-rate coupons for fixed-rate CRE loans in this example.

3. Budgeting for the Consensus Rate Path

The market currently expects a gradual decline in short-term rates and a steeper yield curve through 2026. That projection may appear encouraging, but history suggests the market forecast is wrong more often than it’s right.

Budgets built solely around the consensus view risk being blindsided when rates move faster, slower, or not at all. Testing alternate rate paths may reveal how sensitive funding and loan cashflows truly are and where to hedge or adjust assumptions.

Suggestion: Develop a few alternate rate scenarios: one aligned with the forward curve, one with a faster decline, and one where rates stay flat. Run each through the loan model to see how portfolio cashflows, originations, and margins would respond. Build a plan around the range of outcomes, not the most convenient one, and identify where to optimally deploy excess cash if prepayments exceed expectations.

4. Relying on Static Prepayment Assumptions

Prepayment behavior can shift rapidly as rate incentives change, yet many budgets still rely on static assumptions carried forward from the prior year. When prepayments accelerate, the volume needed to sustain portfolio growth and the funding required to replace runoff can rise sharply. This dynamic is one of the most common reasons institutions miss early-year growth targets.

The chart below highlights how sensitive prepayment speeds are to rate incentives. Even a modest 50-basis-point improvement in borrower rate advantage can more than double the likelihood of prepayment.

Source: Loans360° Forecasted Loan Study Document, Residential Fixed 30Y Model Category

Suggestion: Refresh prepayment assumptions regularly based on recent data and prevailing rate incentives. Run sensitivity analyses by loan type to see how small changes in rates could reshape portfolio cashflows. Leveraging instrument-level prepayment models (widely regarded as the gold standard) may help align budgets with actual borrower behavior rather than static assumptions.

5. Focusing on Growth Instead of Cashflows

Finally, the most fundamental mistake: treating growth as the goal, rather than the outcome. Growth goals don’t drive performance, cashflows do.

Effective budgeting starts with understanding the cashflows that occur under different rate and behavioral scenarios. Those cashflows, not arbitrary growth percentages, determine what’s realistic, what’s risky, and what’s achievable.

Suggestion: Reframe the planning process around cashflow forecasting. Start each discussion with expected principal inflows, prepayments, and maturities before setting growth targets. Budgeting around what’s likely to happen rather than what the institution hopes will happen enables a more resilient plan.

The example below, taken from a Loans360° page currently in development, brings these components together and shows how projected payments, prepayments, and new volume planning connect to create a complete portfolio forecast.

Closing Thoughts

As institutions finalize 2026 budgets, all would be well served by taking a hard look at the assumptions beneath them. Are they supported by data, or carried forward by habit? Are they flexible enough to hold up if the rate path changes or if borrowers behave differently than expected?

A budget grounded in cashflow realities is more than a plan; it’s a risk management tool. And in the year ahead, that distinction will define who meets plan and who misses it.