The Fed has officially raised rates, with the intention of continuing to do so several more times this year. What does that mean for your financial institution, and how will it affect your Budgeting and ALM/IRR programs in 2022? Let’s focus on a few areas of concern, specifically Financial Reporting, Strategic Decision Making, and Board/ALCO oversight.

Financial Reporting

The first wave of rising rates will likely be felt in your financials and should be planned for and reflected accordingly. This includes accurately forecasting where the rate jump will hit your numbers; from how it will affect loan and deposit balances, down to the impact it will have on your net interest margin in not only the short-term, but also the not-so-near term. At this time, it’s important to revisit your original 2022 projections and start testing “what-if” scenarios to see how various possibilities could play out – including best-case, worst-case, and most-likely-case scenarios. As rates continue to move, we’d encourage you to regularly review your cash flow model assumptions, stress tests, IRR policy limits, and overall rate assumptions in your IRR model.

Strategic Decision Making

Changing rates will not only affect your financial projections; they will also affect the way you strategize to meet your financial targets. For example, if you believe that there might be a drop in deposits as customers save less and spend more due to inflationary pressure, you may plan to ramp up marketing around CDs or other deposit products. Or, if there is a projected dip in loan demand due to increased interest rates, you may consider meeting with your lending team to brainstorm tactics to bridge projected gaps. The key here is anticipating reasonable and possible scenarios and proactively planning ways to mitigate them before they become a reality.

In order to best simulate these decisions and have well-informed discussions, those “what-if scenarios” we discussed earlier will come in handy.

Board/ALCO

Your Board and ALCO must be kept abreast of all changes, including how a rising rate environment could affect your organization in the short and long terms. Consider how you can best communicate these implications both effectively and efficiently to such diverse groups of individuals. For example, while your CFO may need to see a granular view, your Board/ALCO may benefit most from a bigger-picture, more visual style of reports. At Plansmith, we encourage our clients to take advantage of our Executive Dashboard feature, which allows reports to be easily transformed into graphical, web-based formats, which can be pulled up and discussed during meetings. No matter how you choose to deliver the information, ensure the information gets in the hands of all key parties so that they can meet their fiduciary responsibilities to your organization.

Preparing for Rising Rates

It’s been a while since we’ve been in a rising rate environment, and accordingly, we understand if you have general questions about preparing or topics discussed in this blog. If you’re unsure how your current Budgeting and ALM/IRR programs will hold up, Plansmith is here to help. We offer fully integrated Budgeting and ALM/IRR software that makes reporting easy. Or, if you’d prefer to take it off your plate entirely, our team of former examiners can help you outsource these responsibilities. We also offer a mix of in-house and outsourced solutions – the possibilities are as unique as your organization.

Click here to schedule a discussion about your needs.

Dave Wicklund
Director of ALM Advisory Services
dwicklund@plansmith.com