Plansmith Blog

How Will Rate Changes Impact Your Budget?

Posted by Craig Hartman on 3/11/20 9:48 AM

Everyone probably has their budgets in place for 2020 by now. And now comes along the Coronavirus and messes everything up. The Fed has already lowered rates by half a point. So, now you’re scrambling to figure out how this will impact your 2020 plans?

Seems like you have a few choices:

1) You could take a wait-and-see approach while explaining variances to your management and board how this was unexpected.

2) If you’re using a spreadsheet, go back and adjust new yields and growth to change targets.

3) If you’re using a pre-built model, change the driver rates and let the system recalculate offering rates based on your models, recalculate prepayments, and adjust new balance targets for expected change in growth.

In this third option, you have the opportunity to measure the impact on your budget by year end or beyond, i.e., the risk to your budget. This is different from regulatory interest rate stress testing where rates change immediately. This method applies interest rate changes and their complete impact over time, not immediately. This is a much more useful technique, in my view, than the shock approach which is unrealistic. In planning, we are interested in our real outcome.

In all of these cases, you should be adjusting the action plans you have already built to support your new forecast. As we know, there is more to budgeting than just getting the numbers right. We have to back up our targets with an explanation of how we intend to reach them. Many budgets are simply trends carried forward. If that’s the way the budget was built, then we’re saying we’re not really involved with hitting the target, and we can step aside and continue with what we’ve been doing. However, as we’re seeing now, the world isn’t trending – it’s been disrupted and is reacting to unforeseen events. I’m not saying we should or can predict unforeseen events, but if we want to be in charge of our own outcome, we should be working to control our future, not just riding along. Number crunching only provides the mathematical support for our decisions, but the plans we implement help us realize our goals.

If you set a target and measure progress, it is more likely to get done. For example, simply saying in a budgeting meeting that you’ll grow loans isn’t very specific and needs more detail on how that will be done. You need to build a playbook that includes the name of the responsible person, the action they will take, the start and end dates, and the target (if appropriate).

For example:

Bill Smith, 24 average $150,000 new Mortgages by year end. This can also be broken down to two new loans per month starting next month.

Now track it. Each month discuss how far along this is. Discuss what’s working and what isn’t in finding and making these loans. It’s actually pretty simple.

This process will help bring problems to the entire team to share. When something isn’t working, alternatives can be discussed for re-planning. As the head of Ford Motor Company used to say, “If you have a problem and share it with the team, we have a problem. However, if you have a problem and don’t bring it to the team, then you have a problem."

Topics: interest rate risk, community bank interest rate risk, community bank budgeting, community bank planning, credit union planning, budgeting