Plansmith Blog

The Importance of Experimentation in Financial Institution Planning

Posted by Sue West on 5/1/23 1:00 PM

For many, the art of planning feels counterintuitive, as its core is not accounting-based as much as it’s a sociological experiment. We use a planning model to simulate the environment and measure the ramifications of change on the balance sheet. However, the real test is anticipating the resulting business hinging upon your customers’ changing needs.

You hear over and over again that the one thing you can always count on is change. Change is what you hope for as a financial intuition. It’s what drives business and profits. Rate change, as we all know, can be one of the most volatile components of your business, and at the same time, the very heart of banking itself.

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Asset Liability Management and the Link to Bank Failures

Posted by Dave Wicklund on 4/5/23 1:13 PM

It was only two months ago we released a blog discussing the critical role that liquidity management will play in 2023. Fast forward to now, and two financial institutions have been closed due to, at least in part, funding imbalances – the first banks in three years to fail. Although liquidity and interest rate risk often take a backseat under stable economic conditions, times like these require you to take an in-depth look into your asset liability management program to ensure you have a plan to both meet funding needs and stay in compliance with regulatory expectations.

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Why Choose Plansmith for Your Budgeting and Forecasting Needs?

Posted by Megan Plis on 3/6/23 1:36 PM

With the increasing number of financial planning software options available, it can be difficult to determine which one is the right fit for your organization. That's why it's essential to consider several key factors before making a decision. In this blog, we'll examine how Plansmith's planning suite stands out from the competition and why it could be the perfect choice for your financial institution.

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Liquidity: Read all about it!

Posted by Dave Wicklund on 2/6/23 11:44 AM

What do a massive uptick in deposits, a possible impending recession, and a tremendous hike in interest rates have in common? Absolute potential for wreaking havoc on your institution’s liquidity position. One unplanned or mismanaged situation could mean falling out of policy limits, or worse.

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Welcome Peter How, Planning Advisor!

Posted by Sue West on 1/10/23 10:20 AM

Join us as we welcome our newest Planning Advisor, Peter How! At Plansmith, we’re excited to have such an experienced community banking veteran on staff. Read on to learn about Peter’s career and how his background will add value to our clients’ planning experience.

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CECL 2023: Where Does Your Financial Institution Stand?

Posted by Brett Hendricks on 1/3/23 3:26 PM

Easily, the hottest regulatory topic of the past seven years is CECL. On top of the long-term lead up, the regulations and deadlines have changed so many times that many institutions hoped the requirement would disappear altogether. However, as of January 1, 2023, CECL is a reality. So, how confident are you in the solution and CECL reporting tools your bank or credit union have decided to implement?

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Three Most Frequent Pitfalls of Interest Rate Risk Management Programs

Posted by Dave Wicklund on 12/1/22 2:42 PM

Establishing and maintaining a sound interest rate risk (IRR) program is crucial to ensure proper balance sheet structure and comply with Regulatory expectations. During my 20+ years as a senior FDIC examiner, I routinely saw organizations experiencing issues with their ALM/IRR practices, ranging from loose misunderstandings of the guidance to critical errors that put the health of the organization at risk. Unfortunately, in my current advisory role, I see the same issues all too often.

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Surge Deposits: Here We Go Again

Posted by Dave Wicklund on 11/1/22 10:00 AM

About two years ago, I wrote a blog declaring the end to, or “the death of,” Surge Deposits. In that post, I had noted how at the time of, and following the 2007-2009 Great Recession, the banking industry saw a substantial influx of deposits as real estate and equity investors liquidated positions and sought safe places to store their money and ride out the storm. I further noted that as CD rates plummeted during, and following, the economic crisis, CD holders weren’t being provided with any incentive to have their money “locked” into time deposits. As time deposits matured, CD holders routinely moved their balances into more liquid non-maturity deposits (NMDs). These former CD holders were essentially temporarily “parking” their money in NMD accounts, just waiting for CD rates to return to what they believed were more “normal” levels, at which time they’d move the balances back into time deposits.

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Stress-Free Budget Building

Posted by Sue West on 8/10/22 10:01 AM

Banking is relentless in its daily demand for your time and attention to detail. We know this firsthand, as most of us are former bankers and have been in your shoes.

Stresses around day-to-day responsibilities will never be eliminated, but those associated with your budgeting can be. This is why we built Compass and why you chose us as your software provider.

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Product Profitability and Funding

Posted by Sue West on 8/2/22 9:27 AM

As increased competition and consolidation challenge the financial industry, your business must continue to adapt using strategies for success, not unlike those of other businesses.

Manufacturing and retail have long used product management techniques to meet competitive pressures for pricing, product planning, and growth strategies. If financial institutions are to survive and prosper in this highly charged competitive environment, management must understand and control all components of profitability. Margin and equity risks have been addressed using regulatory rate shock methodologies, as well as recommended and required stress testing of the loan portfolio, including loan losses. Product profitability combines these concepts with an often-overlooked element of cost – overhead.

Before beginning a budget, finalizing any financial plan, or setting in motion any actions for execution, it is imperative that management knows their cost structure. Armed with this knowledge, the team will be able to identify opportunities, avoid diminishing margins, and provide services in the most efficient way.

With this, then, we advocate using a simple and effective Product Profitability analysis. The necessary detail is easy to obtain and manage within your existing planning processes. To begin, you must assign an overhead cost factor to all interest-bearing product lines. This percentage represents the basis point adjustment deducted from an account’s gross yield. You may use either internal or external data for this measure.

Next, determine if there are there other factors affecting your product line’s interest rate that should be noted. For example, costs associated with Loan Losses or Fees that are associated with this product line, but are recorded separately on your income statement.

The last – but very important – factor remaining is the product line’s repricing frequency. As with all other risk analyses, repricing frequency is key to risk management and match funding analysis. By sorting asset balances by repricing frequency, your baseline is now complete. With these details in hand, you will be ready to build a platform for your analysis. Let’s review.


• Repricing frequency
• Current EOM Balance
• Current Yield (FTE)
• Net Overhead Adjustment
• Losses/Fees

Repeat the same for interest-bearing liabilities.

With this simple-yet-analytically-rich information, you can next build an effective analytical report. Here, there are two methods for presenting the data: Match Funding or Funds Pooling.

The example below illustrates the Match Funding method. This analysis sorts first by repricing frequency of the interest-bearing asset. It then funds the asset with liabilities, also sorted by repricing frequency.


This matching approach groups volumes and rates by the inherent repricing risk embedded in your product line. As part of the liability funding, we’ve also distributed an allocation of Capital, both Risk-Based and Excess Capital, to each asset in the analysis.

A waterfall report is then created, as the liabilities “fill up” the asset category until their volumes are matched, then any remaining balances flow into the next asset category. As the balances are matched, the rates are displayed and adjusted for overhead. Loan yields are further adjusted for Loan Fees, and reduced for anticipated Loan Losses. Liabilities are credited with service charges when applicable and the Net Rate is displayed.

The importance of this approach is to identify each asset’s True Rate and True Cost of funding that activity. This method can bring real insight into the true performance of your product line.

It is not uncommon at this juncture for many to argue with the allocations. If that becomes the case within your financial institution, then we suggest a Funds Pool approach.


Funds Pooling uses the same analytical methodology; however, it consolidates the funding liabilities into a pool. The pool remains consistent for all interest-bearing assets, eliminating arguments about liability allocation.

In either case, the end results are significantly informative to the financial institution, including your management team, Board of Directors, and Examiners. What is the TRUE rate for the asset product category? What is its Return on Equity, and what is its cost per $1 of revenue? These are important insights that should be examined regularly, especially during times of economic shifts such as rising interest rates and inflation.

How to Use This Information: There are three specific uses for product profitability information: to develop product strategies for your marketplace; to improve the pricing of service lines to make them more profitable; and, to ensure profitable increased growth.

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