A: Its failures.

Planning is not accounting, is it a sociological experiment.

You hear it time and time again; whether the rate environment is on its way up or on its way down, change is in the air. Change is what you hope for as a community bank, it’s what makes you profitable - just don’t get caught with your rates down.

What rates? Good question. No two rate cycles are ever alike. There’s no way to predict what your customers do. We can only react, right? Well maybe predict is too strong of a word. With a planning model we can experiment with several rate environments and quantify results for a variety of situations. Only by experimentation can we select a plan of action that best meets our corporate objectives.

Preparing for change is what makes community banking exciting. It’s what drives margin and the overhead to support it. You can create an experiment to motivate change. For example, what type of products are your customers in now and how might that change? Don’t know? Let’s experiment.

Your customers have choices regarding your products and services. On the deposit side they could: 1) do nothing, 2) move their money between products within your company, or 3) they could leave and go to a competitor or non-financial intuition such as an insurance company or perhaps try the market. On the asset side we have customer need/demand. But how do you stimulate production of loans in those types that align with the community bank’s strategic goals? Through rates.

How you price steers your customer to the product and services which best support your business plan. It’s much like putting a ‘best value’ tag on a lunch menu option. The products you wish your customers to use receive a more favorable rate. Those products you would rather not support, as they are outside your business plan, you discourage in the same way by setting less favorable rates.

Rates or pricing of your products invite new business, while at the same time migrate existing business to other product lines. The product lines favored must support your business plan. For example, if you believe rates will rise a small amount the remainder of this year, but a larger amount the first half of next year, a strategy may be to offer a better rate today on 18 or 24 month CDs. The customer benefits with a better (higher) rate today while you lock that money up through an unpredictable period in which you expect rates to be even higher than those you are offering. In effect you are expensing more now, and saving lots in the end.

The second component of your experiment is to predict how much money you believe will be coming in as new business, and what will switch between product lines. Evaluating the results of your experiment comes in two forms as well, profitability and interest rate risk as the composition (duration) of the balance sheet has now changed.

None of this will be exact. You may even be wrong. But you will be prepared.

We believe that by experimenting with your model you will find the strategy that best fits your business plan. Be sure to document the actions needed to make this strategy successful and share that action plan with your entire community bank.